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LONDON (Reuters) - The significance of Dutch PM Mark Rutte's election win can probably best be expressed in a series of negatives.
It means there is no breakthrough for now for his anti-immigrant, anti-Islam challenger Geert Wilders and that there will be no knock-on boost for Marine Le Pen in the French elections. But it is also no massive vote of confidence in Rutte (his party lost seats) and is certainly not the end of populism in Europe.
Wilders' party gained seats, and Rutte could only ward off further gains by taking up populist positions himself. Moreover, he also looks to have drawn a one-off benefit from his tough stance on Turkey in the diplomatic row over Turkish campaigning for its expats.
For now, Rutte is like the boy in the Dutch legend who put his finger in the hole of a dyke to hold back a flood: More work is needed to reconcile a large chunk of the Dutch electorate who are hostile to immigration and fed up with mainstream politicians. Rutte now faces difficult coalition negotiations and may find himself shifting further rightwards to get support for a new government.
French presidential candidate Emmanuel Macron will meet German Chancellor Angela Merkel in Berlin - itself a sign the new frontrunner in the French election is being taken seriously by Europe's most powerful leader. It is further evidence of the lows to which the campaign of his rival Francois Fillon - the natural, conservative political counterpart of Merkel - has sunk.
Separately, Merkel's lieutenant, Finance Minister Wolfgang Schaeuble, is due to meet his U.S. counterpart Steve Mnuchin for talks in Berlin notably to prepare this weekend's G20 meeting of finance chiefs where the avowed trade protectionism of the Donald Trump administration will be a bone of contention.
World markets dodged two potential banana skins from policy and politics on Wednesday and have staged some of the biggest one-day moves of the year over the past 24 hours, lifting global equity indices to new record highs and dragging the dollar and government bond yields sharply lower.
First, the Federal Reserve hiked interest rates for the first time this year as expected but gave no sign of accelerating the pace of rate rises already built in to futures markets. Two-year Treasury yields fell up to 8 basis points overnight in their biggest one-day fall since June and the dollar index sank to a three week low.
And second, the Dutch electorate has eased some concerns about rising support for right-wing populism across Europe and looks to have re-elected Prime Minister Rutte’s party in parliamentary elections, leaving the far-right, anti-euro candidate Geert Wilders trailing by a larger margin than even the most recent opinion polls had indicated.
The big implication for markets is that it tempers expectations French far-right presidential candidate Marine Le Pen can overcome her substantial deficit in opinion polls ahead of the two-stage French election in April and May and eases concerns that opinion poll methodology in some ways has not captured all the support for right-wing populists.
With Le Pen still trailing centrist candidate Macron by about 20 percentage points in any second-round run-off, the 10-year French sovereign debt yield premium over German equivalents has fallen back below 60 basis points to its lowest level in 10 days and the Fed/Dutch one-two has catapulted euro/dollar above $1.07 to its highest level in a month after the biggest one-day gain since June on Wednesday.
In line with stock market gains of almost 1 percent on Wall St and across Asia earlier, European stocks are expected to open up by a similar amount later.
The easier dollar and U.S. Treasury yields, where the 10-year slipped back below 2.50 percent, has seen emerging market equities outperform – and despite another interest rate rise from the People’s Bank of China earlier. MSCI’s emerging equities index gained almost 2 percent to hit its highest since mid-2015 and is on course for its biggest one-day gain since last July.
The next big events for markets will be details of U.S. President Donald Trump’s 2018 budget later and then tomorrow’s G20 finance chiefs meeting in Baden-Baden in Germany.
In a heavy day for major central bank meetings, the Bank of Japan left policy unchanged earlier while acknowledging the pressure from rising U.S. interest rates. The Bank of England and Swiss National Bank are likely to stand pat, too, when the announce their latest policy decisions later. Norway’s central bank also meets and there is likely to be another small upward hike in one of Turkey’s complex series of short-term interest rates as it battles to defend the lira.
Editing by Hugh Lawson