I closed yesterday’s column saying better to be a tad long than a tad short on the risk front. Well, was that ever the understatement of the year … to date?
Taking the numbers off the top, the CAC rallied by 4.14%, the Dax by 3.37% and even the FTSE 100 found another 2.11%. That now has the CAC up by 8.36% year-to-date and the Dax by 8.48%. Over the pond the rally carried on with the Dow and the S&P adding just over 1% each and the Nasdaq clocking 1.24% to set another all-time high at 5,983.82. In intraday trading it got to within a whisker of 5,990 and hence also the great 6,000-point barrier. Asian equity markets have been on fire too and if the feel-good follows on, the Nasdaq might break through today.
It’s clear that markets were relieved that France will not be faced with a Le Pen/Melenchon run off and that Emmanuel Macron is now seen as a shoo-in for a week next Sunday but was there really that much fear built into risk asset prices? Yes, Melenchon had been chittering about nationalising the banks but to see Credit Agricole stock run up by 10.86%, Societe Generale by 9.86% and BNP Paribas by 7.52% makes me wonder how much thought had gone into either the pre-election valuation of the banks or, more worryingly, their post-election pricing.
REACTION
Isn’t it funny that markets in Europe reacted in exactly the same way to a centre-left open market internationalist being elected – or nearly elected - as US markets did to the same event anointing a right-wing nationalist protectionist? Someone somewhere said to me yesterday that there were simply no prizes for not being long. I did speak to one City grandee who had met Macron in the run-up to the elections and who commented on how impressed she had been with him and how clearly he saw the way forward.
I have absolutely no doubt that he is, as Brutus was, an honourable man. But what I question is whether all those people who voted for him and who will do so again on May 7, along with many others who find Le Pen and her politics odious, will in time prove to have liked the ideas more than they do the reality. The Le Pen rejectionists, especially those outside of France, are lauding Sunday’s result as a resounding rejection of populist nationalism and are calling the high watermark of the movement.
I disagree - or perhaps more accurately, I question the timing of that statement. The true test will come when we find out how many of those who did not vote for her in the first round will switch to backing her over Macron in the second. Consensus is for a 60/40 vote for Macron; I’d suggest it be closer to 70/30 but we must now sit back and wait to find out.
WORKING CAPITAL
But in the end, who cares? The question remains not about what a President Macron might intend to achieve but what his chances are of actually doing so. Remember that it had been François Hollande’s solemn promise, when elected, to bring down unemployment and, unless I’m much mistaken, that figure was at 9.7% when he assumed office and it currently stands at 10%. I cannot repeat often enough that there is nowhere in the industrialised world, other than maybe Italy, where popular resistance to change is greater than it is in France.
The introduction of the 35-hour week by the then-prime minister Lionel Jospin in 2000 was supposed to create jobs by spreading the workload among more people. What it actually achieved was to push French productivity higher – the same job just got done in less time – while doing dick on a stick for unemployment. Abolishing it would, quite likely, achieve not much more than to kick the bucket out from under the exemplary productivity performance. Thus, if macron were to want to put one foot in front of the other, he’d have to take on the arcane labour laws. I wouldn’t say that better men have tried and failed but I think I can rightly say that many equally talented and highly motivated men have bitten their teeth out trying to change the culture of the labour market.
New brooms might sweep better but only if the muck isn’t Super Glued to the ground.
TAX BREAK
Meanwhile, the great US taxation announcement by President Trump is springing its first leaks and the big headline number seems to be 15%, that being the objective for corporation tax. For a country that has built its fiscal model on taxing corporations rather than individuals that’s a big, big step. Not only that, it is one that flies in the face of what is supposed to be the Donald’s party’s key principal of fiscal conservatism.
The White House team is working with a dynamic model that assumes that the initial shortfall will be made up over a 10-year period by increased investment and production activity and regards an interim increase in the national debt of US$2trn as a price worth paying. Congress will not be happy and the more static fiscal models used on the Hill will triggering flashing lights and howling sirens. Equity markets may be excited by the prospect of lower corporation tax but as it stands, I can’t see a 15% tax rate standing a snowball in hell’s chance of being enacted without terms and conditions that make it impossible to expedite.
As far back as Trump’s nomination last year I noted that he might have succeeded in gaining the use of the Republican platform as a vehicle from which to launch his assault on the White House but a Republican he is not. Before he duped the people, he duped the party. Bit by bit the Republicans are working out that he’s not really one of them and that much of what they stand for has little meaning to him. I see another schism developing like the one over Obamacare and either Trump has to play safer or risk another withering defeat. With the debt ceiling issue on this week’s congressional docket, Trump could not have found a worse time to propose tax reform that will push debt another 10% higher, over and above the already eye-watering accumulating deficits and debt pile.
We used to criticise people who took out new credit cards in order to pay the interest on their existing ones. Why than do we get so excited when a president tries to do the same on a federal level?
BLACK DOWN
Meanwhile oil, which had dipped below US$50 per barrel again on Friday, continued to fall and WTI closed on Nymex at US$49.23. Whether weaker oil represents a decline in demand or a continuing excess of supply is a moot point. If Opec rhetoric is to be believed, then it is not the fault of the supply side, which would of itself be bad news for economy bulls as it would indicate an ongoing decline in demand. From here that looks unlikely and suspicion must be on a bit of covert “pump, baby, pump” going on against the rules.
Both arguments have their merits. The recent sharp decline in the CRB (Commodity Research Bureau) index is not exactly pretty but at 420.34 it is well off the December 2015 low of below 380 but also a mile away from the June 2014 high of over 500. In fact it is sitting pretty much slap bang on the 200-day moving average.
Let’s face it; when all is said and done what we want to know is whether the global economy is still on the rise or whether it past its peak and is at the beginning of cyclical downturn. The “past its best” brigade have been screaming “Sell!” for a while now and so far they have proven to be nothing less than consistent, even though it has been consistently wrong.
If anyone were to feel the desire to lock in some of yesterday’s profits I would not stand in their way. But is it time to throw out the baby and the bathwater? Most probably not. That is the mood markets are in. But the blind exuberance of yesterday’s rally shows just how fickle markets are at the moment and I would not put it beyond them to do something very similar, albeit to a lesser extent, in the opposite direction and at any time.