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Markets confident about May, relieved about Macron

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Theresa May’s shock announcement of a snap election last week sent sterling sharply higher as markets judged that a bigger Tory majority would smooth Brexit negotiations, reducing the probability of a hard Brexit. However, the pound’s rise was tempered on Friday by uncomfortably weak retail sales figures which suggest that discretionary spending is being restricted as inflation rises and real wages stagnate – even threatening imminently to decline. From the PM’s perspective, the election cannot come soon enough.
As last week’s Bulletin suggested, it is not just for reasons surrounding Brexit that May’s life will be made easier as a result of a larger majority. Certainly the news that Brussels will seek ongoing post-Brexit protections for EU residents in the UK (with corresponding rights for UK residents in the EU) will have filled her with dismay, since it threatens to leave the European Court of Justice with influence over UK affairs even after Brexit. However, this ‘line in the sand’ from Brussels justifies the PM’s decision to go to the country and seek an increased majority. With her existing majority of only 17, this sort of demand from Europe would have had the right-wingers of the Conservative Party frothing at the mouth.
In seven weeks’ time, the right-wingers will still be frothing from time to time but, the PM calculates, her new mandate will mean that she will be able to pay them scant attention. In effect, May is seeking to avert the nightmare of John Major’s government, when, with a similarly small majority, he was constantly held to ransom over Europe by the eurosceptic ‘bastards’ of his own party. Plus ça change, plus c’est la même chose.
This brings us to the French presidential election. After Brexit and Trump, betting on the outcome in France has been a sport for the bold only. Well done those who managed to back Mélenchon at hundreds to one and laid him off just before the vote at 18/1.
Ex-Ukip leader, MEP and bon viveur, Nigel Farage is on record as saying that Marine le Pen has a bit of a thing for him (these were not his actual words which were more physical in tone). Indeed, it is likely that Le Pen’s election performance was boosted by the Brexit referendum. The French establishment will deny this for reasons of self-preservation. However, the result was surely another manifestation of the strong winds of change that are blowing through politics everywhere. It is unprecedented for both of the two mainstream parties to fail at the first round.
Nonetheless, the second round, on 7 May, is the one that counts and it is virtually inconceivable that Le Pen will beat Macron. After all, the French system was devised to prevent just such an occurrence. A Le Pen victory is, at least, another thing we need no longer worry about. Certainly, that is the way the markets see it.
Having gradually declined from a high of 74 basis points last week, the spread of 10-year French over German government debt has dropped sharply this morning by another 20 basis points to 43 basis points, as the risk of French election-driven financial chaos melts away like snow in springtime. However, in the medium term the career of Marion Maréchal Le Pen, Marine’s niece, will be closely watched. The Le Pen family are nothing if not tenacious and organised as they play out their multi-generational wooing of the French electorate.
On the subject of multi-generational wooing, Emmanuel Macron’s wife, who at 63, is 24 years older than her husband, has three children from her previous marriage, the youngest of whom is 30. Wikipedia suggests that these offspring are still living at home. This seems unlikely but, if true, goes to show that despite Macron’s efforts as Economy Minister under Hollande, it is still very difficult for French youngsters to get a job, find a flat and move out.    
The problems of the young notwithstanding, the French election comes at a time when, generally, things are continuing to look up in the eurozone from an economic perspective. Last week, final core CPI for March came in as expected at 0.7%, meaning that all is clear on the interest rate front for some time yet (though this number is expected to have risen to 1.0% when April data are released this week). Ongoing stimulative monetary policy should allow economic expansion to continue and this was borne out in the PMIs for April. Eurozone manufacturing and services PMIs both came in higher than last time and above expectations at 56.8 and 56.2 respectively.
These were strong numbers, and contrast sharply with last Friday’s PMIs in the US. There, the manufacturing index was down to 52.8 (from 53.3 in March), while services were down to 52.5 from 52.8 in March. It appears the Trump bounce is over. There was little reaction from the markets, which remained focused on the French election, but the 10-year yield spread of Treasuries over Bunds is now around 40 basis points lower than the peak towards the end of December last year. If this differential continues to narrow, it is difficult to see anything other than upward progress for EUR/USD.
Unsurprisingly, the euro was resurgent this morning on the post-election relief rally. EUR/USD gained over two cents to 1.0928, before settling back to 1.0860. At the same time sterling lost a cent and a half and trades at 1.1810 at the time of writing.
This week again sees little data. Tomorrow, there are UK public finance data but these have been less important for the markets since last Autumn, when Hammond abandoned Osborne’s plan of eliminating the budget deficit by 2020. Incidentally, Hammond also looks set to abandon the controversial and expensive pensions ‘triple lock’ which, unless removed or reformed, threatens to restrict his flexibility on the public finances. Friday will see the first estimate of Q1 GDP for the UK (expected +0.4% q/q and +2.2% y/y).
The ECB meets on Thursday, but no change to policy is expected ahead of Friday’s first estimate of eurozone inflation for April. Both headline and core CPI are expected to have risen by 0.3% since March – to 1.8% and 1.0% respectively.

All views expressed here are the author’s own and are based on information and data available at the time of writing.



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