Blain's Morning Porridge - France likely outcomes... none of them brilliant..
Blain’s Morning Porridge – April 18th 2017
“Why did Constantinople get the works? That’s nobody’s business but the Turks..”
I was quite delighted not waking up to headlines describing destruction and mayhem over North Korea over the Easter Break. Still an issue tho.. just like wondering what happens to the Trump Jump reflationary expectations in the US. Most of the market newsflow has been about France - although the potential consequences of the Turkey plebiscite probably deserve more focus.
I read half a dozen contradictory market calls re France and Europe over the weekend. They can’t all be right. Some firms are calling sell France and buy bunds, others say Euro stocks are still a buy, but short the French component. Others say short the Euro - which will crash to all-time lows if Le Pen or Melenchon wins.
Whoa. I'm a buyer... Why?
Well, consider the likely results:
The front-runners for the May 7th Run-Off remain Macron and Le Pen. While they are currently tied in the first ballot, everyone is confident Macron would comfortably win the second vote between them.
Macron only needs to make certain of his place on the second ballot by maintaining a lead through this week - which broadly means not saying or doing anything stupid, and sounding presidential. He's dull, boring and predictable enough to get away with that. There is a High Probability Macron makes it onto the second round and wins.
The likelihood something unforeseen happens to the Le Pen campaign is higher - while she has been a strong performer, her party's predilection for gaffes is high, and I wouldn't be surprised if there was something unexpected in terms of judicial interference, a financial scandal or something else predictably unpleasant in the works. There is a High-Moderate Probability she makes it to second round and loses - Low Probability she wins a second round.
A less likely, but potentially bigger "shock" risk is Melenchon making the second round cut. Surprisingly JLM might do better in a two way race vs Macron than Le Pen. While Le Pen has a clear appeal to a certain class of disenfranchised French voters, it's binary: love or loathe the NF policies. JLM's appeal is more nebulous - attracting votes from the young, the concerned and the motivated, plus he's a more attractive option for bleeding-heart Liberals. Imagine if Jeremy Corbyn could play his unpalatable policies so well?
JLM's rise has been meteoric, but I'm told there is a sense across France he's left his big push a week too late. But, it is also likely he will still lose a second round to Macron - the gap between first and second rounds gives voters the opportunity to think with their heads rather than hearts - which is where JLM has been aiming. There is a Moderate-Low risk he makes it to the second round.
If its a JLM versus Le Pen second round (Low Probability) then JLM is more likely to be the name French opinion coalesces around. A JLM win will clearly damage sentiment towards France and generate further uncertainty on the Euro - but is probably less damaging than Le Pen.
You'll notice I've not bothered with Fillon. If, by some curious conflabulation he makes it... then French elections are no longer much of a worry.. (unless it's not a Macron vs Fillon match!) The bottom line is a Macron election win remains the most likely outcome. His government won't be brilliant, but it will be upside for French debt and put a bid on stocks. So I'm still saying buy France through the week - Le Spread is going to tighten.
Of course, the above analysis is utterly subject to no-see-ums, whatever's and wtf's through this week.
The Turkey vote was never as close as the media portray it. The No camp were never ever going to win.. Even if 99.9% of the population said No, the count would still have come out with a close Yes... which it did. Europe is now stuck with at best disinterested “Gateway to Asia” and at a potentially hostile “pre-Islamic” state.
What will be the political consequences of unleashed immigration into Europe? How does it change the political landscape? How does an autocratic Turkish leader play the Islam cards in his deck? I note Trump already congratulated him.
Might be time for the Greeks to be making some demands of Berlin...
Regular readers of the Porridge will be delighted to know the Southampton trains ran on time this morning… which makes it a shame I missed my usual one…. I caught a later one and was treated to two civil servants on day-release to do exams in London bitching about their boss. I feel profoundly sorry for whoever she is…
On with the game...
Bill Blain