Blain's Morning Porridge - Nothing to worry about in France... is there... ?
Blain’s Morning Porridge – April 24th 2017
“I have come to the conclusion that politics are too serious to be left to the politicians.”
What was all the fuss about? Macron polled highest at 23.9% in the first round of the French presidential election, and looks like a sabot-in for the second round. Le Pen must know her 21.4% of the vote probably represents her high tide in this cycle – she is unlikely to pick up many of the established party votes, and turnout was high.
We might be able to worry less about “Populism.” Le Pen didn’t get the “undecided” votes her bid depended upon. The massive swing towards a “populist” Front National vote never happened.
The hedge funds who were rumoured to be shorting France on the expectation of an electoral shock – for instance Le Pen poling 30% plus in the first round – are the ones with oeuf on their faces this morning. There were a number of well placed stories last week about hedge funds mining the “big data” thrown up be the social media and concluding a shock was on the cards as pollsters under-reported “populist” voting intentions.
Predictably, Europe has soared on the result. A committed European notionally in charge of France? Tick! A committed European without a domestic power base? Maybe an issue.. But the Euro is up, and were looking like a relief rally driving a stronger stock market. A few weeks ago I had a “concerned” seller of a very decent block of French Semi-Sov guaranteed debt at a very realistic price, but I doubt they will be so motivated to sell this morning.
“Le Spread” between Bunds and Oats ratcheted in 20 bp this morning, before settling around +17. Why hasn’t it tightened further? Perhaps the realisation the end of the French election wobbles put all the other Euro concerns back in play: how the ECB will play the end of QE later this year and its “taper” – which will have huge implications across European bonds and spreads. (June will see the ECB give us Forward Guidance on how it will likely pan out.)
Or is the market already anticipating what a Macron Presidency will/can achieve to repair France? New party and new ideas? Will he really be able to reform the labour market? That is a dark can of worms no French president has successfully opened.
And we won’t know what effect he will have on European unity until we get the German elections out the way later this year. They say Macron has smashed the establishment, or is he just the establishment in another guise? Without a solid party mechanism behind him, he’s going to have to wheel and deal with Le Establishment to achieve much over the coming years. Lets see what really happens after the national elections. I suspect the truth is they are merely “out the way”, and little has really changed.
Of course, there’s still room for a shock from Paris – perhaps Macron saying something profoundly stupid or an outrage playing into Le Pen… but that bottle of wine I bet with a client that Macron would win is looking increasingly safe!
The bottom line on France and markets is the immediate threat might have been removed to the Euro, Europe, bonds and stocks. However, nothing in France is fixed yet. The likely new president faces an uphill struggle to establish himself, and the Front National has not gone away. There is a sizable minority in France that will continue to press for FREXIT and blame Europe for all the nation’s ills – a further alienating the French rural and industrial underclasses. Unless their concerns on the economy and immigration are effectively addressed – sooner rather than later – it remains just a matter of time before we face further “Le Spread” concerns.
Its worth adding the potential big looser from the likely Macron win could be the UK. Macron is a pronounced Europhile – witness the number of Euro flags at his victory-dance last night - committed heart and soul to “Le Project” and keen to re-establish the Franco-German hegemony across Europe, potentially playing into the arms of Brussels hard-liners looking to punish us for our temerity.
Away from Paris, Markets feel risk on this morning. We’re promised a big announcement re tax-reform in the US. Where should we be looking for renewed weakness? China? Middle East? Russia? Korea? The likelihood of yet another US Government shutdown at the end of the week if Congress can’t be herded is going to be awfully embarrassing for Trump.
And, finally, quick word on UK:
I was up in Edinburgh over the weekend and managed to grab time with old friends to get some very mixed views on the coming election. The Sunday Times (yes, I admit I read the Scottish Edition) says 45% of Scots support Independence, but the Conservatives are likely to see their vote soar into the 30s – perhaps winning a double digit number of seats.
I was trying to figure out what’s really going on.
Opinion in Scotland seems to have split into tectonic fault lines. Folk are either vehemently against the SNP and Independence, or passionately (some irrationally) in favour of independence, but its not even that simple.
There is a strong strand of considered “rational” support for independence on the basis it would be tough, the economics are questionable, but Scotland is an imaginative entrepreneurial nation that could establish itself in the same league as the Scandinavian nations and Ireland. This group may drop the SNP in national UK elections – preferring a long-term considered path to Two Nations.
There is a large independence group of vehement “at any cost” nationalists – the tartan thuggery. No point explaining the economic reality, Europe or the oil business to them. This is the core SNP vote. It’s the former labour vote that’s been persuaded it was Thatcher that destroyed their country, therefore its England to blame for all their ills.
On the other-side there are large number of Scots who have come to utterly detest the SNP and all it stands for. These are the potential voters who could shock the SNP at this election – they will consider voting tactically to vote out sitting SNP MPs. However, long-term historical antipathy means many won’t vote Conservative.
Many readers think I’m wrong about Scotland being pivotal to the UK election – but I can’t help but think a stinging rebuke to Nicola Krankie at the polls will create a far more certain and stable market environment!
No porridge next few days – off traveling..
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Bill Blain