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WisdomTree Insights
The European political uncertainty and risks posed to financial markets are—for now—over. A Liberals-led mainstream coalition in The Netherlands firmly aligned with Germany’s EU agenda and a pro-European President of France upending fringe/extreme sentiment preserves the status quo. Also, Germany’s election in September was largely a non-event with Merkel this year leading early on in the polls and the Social Democrats headed by Martin Schulz as runner up. The far right AFD coming as third largest was the main surprise and will complicate Merkel’s efforts to create and run a coalition government. Italy is unlikely to have its election until 2018.
Fixed income has been at the heart of European investor portfolios for many years with average allocations in 2016 standing at 51%. Even in an environment of low or negative yielding domestic government bonds, overall allocations have remained high. Now Eurozone government bond investors are overwhelmingly focused on the risks relating to the end of quantitative easing and the potential for a rise in interest rates at some point in 2018.