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One down, two to go.

Eurozone bond markets are having a good start to the morning after the first of the continent’s major elections this year has seen hopes pf anti-Islam candidate Geert Wilders crushed and resulted in impressive gains for pro-European liberal parties.

Dutch benchmark bonds are outperforming their major peers this morning, with yields slipping nearly 0.02 percentage points in early Thursday trading. The rally has helped push down the premium investors have demanded to hold Dutch over German bonds to the lowest since February at 0.24 percentage points (24 basis points).

The spread had surged to a four-year high of 36 basis points in January after polls showed Mr Wilders’ one-man PVV outfit was on course to become the largest party in the country. But with over 90 per cent of votes counted, Mr Wilders has seen only a five seat swing – making his the second largest party in a deeply fragmented political landscape.

Writes Rabobank:

From a EZ govvie trading perspective, the weaker than feared showing on the part of the PVV has seen a narrowing of spreads and marginally higher German yields (which we would explain due to the election result allaying fears over the strength of European populism and reducing concern over eurozone integrity). However, we think that this move is likely to be short-lived given mounting tension heading into the French elections on Apr 23 (a poor showing on the part of the PVV could be seen simply as an outlier among the other populist events of Brexit and US elections). As a consequence, we feel that the downside as regards our proposed long Dutch bonds, short French bonds trade is likely to, at worst, be limited and, at best, prove purely transitory.

Expected to hold around 20 seats, Mr Wilders will fall behind the ruling VVD’s 33 seats and close behind the the liberal D66 and Christian Democrat party who are both on course for 19 seats (see graphic below):

With no major winners on the night, the country is set for a protracted round of coalition talks with all mainstream parties have firmly rejected the prospect of working with Mr Wilders.

The euro has also rallied in the aftermath of the results which began to trickle in during the early hours of Thursday, trading at a five-week high of $1.0722 against the dollar. Eurozone banking stocks are also bouncing, up 1.4 per cent at the start of morning trading.

Investors will now turn their eyes on France’s upcoming elections which kick off in April. Mr Wilders’ anti-Islam ally Marine Le Pen has not yet officially responded to the Dutch result, but will still be hoping to capitalise on discontent among the French working and lower middle classes.

Read more: Everything you need to know from the Dutch elections

First chart via Bloomberg

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