So went an exited phone call from a close French friend of mine in the early hours of Sunday evening.
Really? Just a few weeks ago she was still certain of a late surge by François Fillon while branding Emmanuel Macron as a teenage nobody.
Her response reflects much of the structural problem with yesterday’s election outcome which was 34% for Marine Le Pen and 66% for anybody other than Le Pen. How much support Macron really has is hard to fathom. The statisticians and election analysts will be busily working out who voted for whom and who swung from being whom to whom. Normally that is fatuous occupational therapy but with parliamentary elections to follow, the breakdown of the electoral pattern will be of serious concern.
MACRONOMICS
The probability of Macron’s En Marche! movement - it’s still a bit too early to call it a party - sweeping into an absolute majority in the Assembleé Nationale next month is modest and the risk of a five-year lame duck presidency is not to be underestimated. They were celebrating in the streets of Paris last night but don’t they do that after every election in France when the arrival of the prospect of great national rebirth is on everybody’s lips? Has everyone forgotten the parties five years ago when François “Qui? Moi?” Hollande promised to do the same?
Macron opened his speech by declaring that he would unite the country – doesn’t every elected leader in the world do the same that in his or her acceptance speech? – and promised to reform the state. Reforming the state entails reshaping the rather unique French social model and that, I fear, will remain, as it has done in the past, an exercise in futility. The state generates over 50% of French GDP and with the trades unions well ensconced in the public sector, strike-bound chaos is always only a hair’s breadth away. Half hearted attempts by former president Nicolas Sarkozy to effect change broke down in the early stages and he lost his bid for re-election for having given up his reform programme before it had even begun. His record of prevarication and procrastination ultimately led to his downfall in what had once looked like a clear run towards the nomination by the Republicans for another crack at the presidency. Now it is Hollande who has failed to move anything and who has become the second successive one-term president.
The collective sigh of relief is palpable although what the muppet-in-chief, Jean-Claude Juncker, was doing openly intervening in French domestic affairs by openly endorsing Emmanuel Macron is beyond me. It perplexes me in the same way as did his recent speech that he gave in French while declaring the use of English is in decline in the EU. When it comes to pocket Napoleons, this ex-prime minister of the mighty global power of Luxembourg takes the biscuit. One very close friend of mine and as fervent a remain supporter as once could find recently referred to him as a “drunken idiot”, a description, based on my own knowledge of the subject, I’d find hard to disagree with.
MARKET STALLS
Risk asset markets across the globe were firm overnight but that can be put down as much to last Friday’s stunningly strong US non-farm payroll report as to yesterday’s Macron victory. Japanese stocks closed up 2.3% in Tokyo but this must be treated with caution as markets were closed for three days of Golden Week and they are in no more than catch-up mode. Shanghai closed lower following another very soft set of trade figures. The net trade balance for April looked just fine at a net surplus of US$38.05bn versus a consensus forecast of US$35.2bn but this was generated by a big miss and a slowdown in imports which at best outdid the miss and cooling in exports.
Back to the US where the labour report pleased everyone. The headline nonfarm payroll, at 211,000, beat the forecast of 190,000 but, and nobody seems to have focused on this, the revision to the already weak-looking 98,000 of March was down and not up taking the final figure to 79,000. The mark down of the March figure by 19,000 is only 2,000 away from the 21,000 by which the figure reported for April exceeded estimates. That said, the barnstormer was the unemployment rate, which declined to 4.4%, the lowest reading since before the global financial crisis.
Thursday and Friday bring US PPI and CPI readings and with the latter now creeping above the targeted 2% level and with near-full employment, the Federal Reserve cannot postpone the normalisation of monetary policy much longer. The Eurodollar strip is already clearly pricing in a 25bp tightening in June – the FOMC meets on June 14 – and traders and investors would need to be either bold or foolish or possibly both to push against that one.
Markets are supposed to buy on rumour and sell on fact, as well as to sell in May and go away. Although both €/$ and index futures shot higher on the Macron victory, they are beginning to give back some of the early gains. At the time of writing the CAC40 is down 1% and the Dax down 0.45%. The euro jumped to US$1.0960 but has now traded back down a bit to the US$1.10 area. As a knee-jerk this might make sense but the big relief rally occurred two weeks ago so there is no reason to believe that the longs are already firmly in place. There is also no reason to believe that the time for profit taking is not upon us especially given that the parliamentary elections might still take the steam out of the Macron presidency before it has even begun.
Meanwhile S&P has reaffirmed Italy at BBB- (stable) and Turkey at BB (negative). I shall be travelling in Italy for the majority of the rest of this week and most of that will be in the north and away from the metropolitan centres. The mood in markets today is that Le Pen’s defeat signals the high water mark of anti-EU populist politics. I hope to learn a bit more about the mood in Italy over the coming days, a country which still has to play its joker – older readers will still remember the Europe-wide TV game show “Jeux Sans Frontières” – and I will be reporting back.
IRONING
On February 21 DCE iron ore futures hit a high of Rmb673.00 per tonne. That closed today at Rmb466.50/tonne, a decline of 30% in just 10 weeks. In heavy trading WTI recovered US$0.70 per barrel on Friday to close at US$46.22/bbl. The simple fact is that we might have global trade but we still don’t and probably never will have a global economy. Time was when there was the US and Western Europe that marched hand-in-hand and Japan, which lived on its exports to those two. The rise of a much larger European edifice with all the former Soviet satellites included and of course of China over the past three decades makes the drawing of collective conclusions as to the state of the world impossible in general and pompous in particular.
Chaos theory, much loved until chaos really did ensue in 2008, told us that the flapping of a butterfly’s wings in the Amazon Basin could lead to a typhoon in Asia. That might be, in theory, but has anybody ever proved it? Did Asian markets really rally on the totally predictable outcome of the second round of the French p[residential elections? I doubt it. In fact the trading ranges we have seen did not exceed those of a completely average Monday. Over the years I have learnt to trade against political moves as underlying economics will always ultimately triumph.
Lots of economics this week, both in Europe and the US – focus on those and good luck.