Euro crisis over? 2017 politics could be markets' biggest test yet

Wed Nov 16, 2016 10:24am EST
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By Jamie McGeever

LONDON (Reuters) - The euro zone has withstood several crises since 2008 that have thrown the 19-nation bloc's very existence into doubt, centered on its fractured economy, bond market, banking system and, of course, Greece.

But for financial markets, the biggest test may be to come and some investors are dusting off strategies on how to navigate an unraveling of the euro zone - or even the European Union itself - and the turbulence that would unleash.

Elections in France, Germany and The Netherlands next year, as well next month's Italian constitutional referendum, are flashpoints that could ignite brewing political discontent across the continent.

They are among the biggest risks for 2017, according to money managers attending this year's Reuters Investment Summit, who noted the surge of right-wing populism that went a long way to determining the surprise outcomes of this year's Brexit referendum and U.S. presidential election.

"Many of our clients are most worried about Europe," said Mark Haefele, global chief investment officer at UBS Wealth Management, who sets the investment policy that guides more than $2 trillion in invested assets.

"The big concern would be a break up of the European Union if you have these more right wing parties like (Marine) Le Pen in France arguing that they want to pull a large country like France out of the euro zone. That worries people," he said.

Haefele himself expects the euro to rise in 2017, reflecting a wider view that a break-up of the euro zone is still an outside bet.

Hedge fund manager Hugh Hendry, however, took a more pessimistic view of the markets' likely trajectory. He said a growing number of investors are playing the "European blow-up" trade which, if it materializes next year, will center on the French election in May.   Continued...

Euro coins are seen in front of displayed flag and map of European Union in this picture illustration taken in Zenica, May 28 2015.  REUTERS/Dado Ruvic