The euro rallied 2% in overnight markets on relief following the first round of the French presidentials. Relief?
The only relief should be that felt by the pollsters who must have been chewing their fingernails up to the elbows but who have already been seen strutting their stuff on the broadcast media. But apart from that?
Consensus rhetoric will be of a seismic shift in the French political landscape with no member of either the Socialists or the Republicans in the run-off and hence neither of them being in a position to occupy the Elysée Palace. The run-off, so conventional wisdom has it, will be between the two great outsiders, Emmanuel Macron and Marine Le Pen with near certainty that the former will sweep home in two weeks’ time. Macron an outsider? They’re having a laugh!
RELIEF SCULPTURE
Macron is a fully paid-up member of the establishment, a graduate of two of the most heavyweight of the “grandes ecoles”, Sciences Po and of course the École nationale d’administration, ENA. His CV also includes, in typical French fashion in which first division players don’t seem to care whether they exercise power from the left or the right as long as they exercise power they take to be theirs by right, a stint as an investment banker with Rothschild & Cie. By the age of 36 he was minister for the economy, industry and digital affairs in President François Hollande’s government. Being smarter than the average bear, it didn’t take Macron long to work out that the Parti socialiste brand is now fatally flawed and that there is also a shift in public attitudes and hence electoral patterns, which has in name only brought a move away from the old right/left agenda.
The seismic shift is not taking place by way of Macron’s now inevitable anointment as president but in the fifth estate’s reluctance to give up the binary right/left labelling. Macron is a member of the europhile French establishment who has benefited from the rampant incompetence of Hollande and the airing of the corrupt practices of an otherwise unbeatable François Fillon. Let us not forget that the Republicans did not implode, it was Fillon who imploded under the pressure of Penelopegate.
A propos Penelopegate, there is nothing that Fillon did which most of his peers did not do as well or would have done if they had been a bit more imaginative. Fillon became a victim not of what he did but of the time in history at which his actions were revealed. It might be a bit early to be a revisionist in respect of the original “-gate”, namely Watergate, but I think there might be a case to argue that Richard Nixon’s undoing was also the timing of his misdemeanours. Had one of his predecessors done what he did a decade or so earlier, it would have passed unnoticed and, most probably, without consequences. But it didn’t in the same way as all the ifs and buts with respect to Fillon’s payments to his wife and children; end of.
It must be fair to say that without Penelopegate, Fillon would have swept into office and nobody would have been talking of seismic shifts.
RELIEF MOVEMENT
So Macron has no party but a political movement. Students of French political history will know that the really great politicians have never followed but led and that they have created parties around themselves rather than shoehorning themselves into fixed structures. The PS was effectively created by the late François Mitterrand out of the old left and the RPR by Valérie Giscard d’Estaing out of the Gaullist movement. Macron has taken the ruins of the Partie socialiste, stripped out some of the older beliefs and has resprayed it in En Marche! colours.
He is, nevertheless, left with the same oppressive 10% unemployment, the same 35-hour week, the same 96% debt to GDP ratio, something in the region of 56% of GDP being spent by the government and no meaningful plans on how to reverse this. He is full of eurocentric rhetoric but has as little clue as to how to tackle the deep structural flaws that hold France back than did his old boss Hollande.
Macron may be young and good looking but the neo-Thatcherite shake-up of France’s ossified social structure and labour laws that Fillon promised to pursue are not part of his agenda. Tinkering will not enough. It is a feature of France that over a glass of wine everybody agrees that something has to change but it is nigh-on impossible to find anyone prepared to be the first to give up any of the benefits of system as it stands. Macron will be, without a shadow of a doubt, both a victim and a defender of the broad status quo.
So I ask again: relief, what relief?
Apart from the big jump in the euro, which saw it rally from US$1.07 to US$1.095 but from which it is drifting back – US$1.0830 at the time of writing – there has been the expected snap back in “le spread” with a massive 19bp tightening of the risk differential between France and Germany. Bunds have cheapened by 8bp to yield 0.32% whereas OATs have rallied by 9bp to yield 0.83%.
TAX RELIEF
Meanwhile the rest of the world has not been asleep. Trump the Disruptor has had another one of his tweeting sessions and we now know that he has slated Wednesday as the day for his much-heralded announcement of reforms to both personal and corporate tax structures. Yesterday marked the completion of his first 100 days in office and one thing which has changed above everything else is the fading of voices who assured us that he would be either assassinated or impeached on some charge or other before the ink on his inauguration address had dried.
He has taken the defeat of his healthcare proposals in his stride and has battled on as though nothing had happened. The tax reforms were supposed to be funded by savings on the disestablishment of Obamacare. With that now off the agenda it will be interesting to see what he and his merry men have come up with by way of an alternative. The benign tax treatment of retained overseas earnings should be included somewhere. Past presidents have funded tax cuts to the individual with heaver burdens on corporations. Trump seems to have some belief that he can somehow fund tax cuts to individuals with tax cuts to corporates. Ermm?
Finally to the UK where Jeremy Corbyn continues his master class of how to place one’s foot in one’s mouth. Last week’s March retail sales figures were not exactly sparkling with consumers supposedly beginning to feel the pinch from sterling-induced price rises in the supermarkets. Rightmove house prices for April at 1.1% month-on-month and 2.2% year-on-year were kind of okay but not sparkling although the key will be in the CBI sentiment and trend survey.
RELIEF WORK
I noted an interesting article on Sir Paul Marshall of Marshall Wace in the FT this morning. Paul and I used to hang out in Zurich together when he was a graduate trainee at Lloyds Bank International and I was doing my bit with Barclays Bank International. I think his career has been a tad more successful than mine. Even back then he was a hardcore Social Democrat and while I was in the pub he was working on green papers and he remained with the movement through the merger of the SDP with the Liberals which created the Liberal Democrats. Now, despite his very deep and serious beliefs in humanist centrism he has moved away from the party to which he was a major donor as he is now a fully paid-up proponent of Brexit. His advice to industry – and I trust to the Liberals: stop moaning and focus on the opportunities rather than harping on about what might have been, which is refreshing and well worth following.
A staggeringly busy week ahead on the data front and company reporting goes on. Nevertheless, I still think the agenda is in the hands of the macro subjects. Difficult to call but maybe better to be a tad long than a tad short on the risk front.
Have a good week.