What is in store for the week ahead in Europe?

While the initial price action to start the week stemmed from the latest atrocities in Europe and London's terror attack, the European markets, for this week, will concentrate on the ECB  and the UK elections as a major event on the 8th June. 

See here for latest UK polls: ICM poll puts UK PM May's conservatives on 45% vs. Labour on 34% ahead of elections

UK elections:

Analysts at Nomura explained that the Conservative lead over Labour is falling and there are risks of it narrowing further. "If this trend continues at its current pace we cannot rule out the possibility of a hung parliament, even if such an outcome is very slim. It is in that vein that we have considered, in this note, what a Labour coalition government would look like and the market implications of such a development. In this election, Mrs May’s Conservative Party is pitted against one of the most leftleaning Labour leaderships in generations.

From our perspective (macroeconomics and markets) the most important differences in Labour’s manifesto relative to the Conservatives relate to Brexit (on the softer, more conciliatory, end of the scale) and higher tax and spending with the likelihood of higher deficits.

For the Gilt market outlook if Labour wins the election, higher Gilt yields are the obvious conclusion thanks to a combination of a) fiscal easing lifting growth and inflation expectations, b) more substantial levels of issuance, c) Brexit plans reducing the chances of a hard exit or cliff-edge. At first GBP may suffer as a result from the UK shifting to the left-leaning side of politics and investors’ expectations of larger deficit financing, but because of the higher real yields we would expect and hopes of a soft Brexit (or indeed no Brexit at all) this should eventually provide support to the currency."

ECB outlook:

The June ECB meeting will be held on Thursday and one of the main themes for observers is the forward guidance. 

"While we expect a more hawkish tone in the post-meeting statement, we do not expect a change in the forward guidance," explained analysts at Danske Bank: 

"Some market participants expect the ‘or lower levels’ phrasing to be removed from the forward guidance on the policy rates. However, we do not believe the ECB will do so. If they did, they would risk an unwarranted tightening of financial conditions. Instead, the ECB could change its rhetoric regarding the growth outlook saying the risks to growth are largely balanced instead of ‘to the downside’. 

The ECB has expressed that ‘a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to build up’, meaning they should not want to risk an unwarranted tightening yet, as it is clear that underlying inflation pressure is still lacking.”