Markets relaxing as populist vote risk diminishes

Suggestion anti-establishment momentum fading, writes Jim Power
Markets relaxing as populist vote risk diminishes

Political risk has been uppermost in the minds of financial market participants, economists, political strategists and anybody else with an interest in global geopolitics and economics over the past year.

The Brexit vote, the election of Donald Trump and the Italian referendum in December very definitely represented the respective electorates giving two fingers to the political establishment.

Coming into 2017, there were concerns about the Dutch election in March, the French election in April and May, and the German election in September. We also have an Italian election to look forward to in 2018.

In the event, political developments so far in 2017 have turned out to be quite benign. The Dutch electorate rejected the far right, and the first round of French voting last weekend, while representing a seismic shift in French politics, most likely sets us up for the election of the 39-year old centrist, Emmanuel Macron next weekend. Assuming that turns out to be the case, the Dutch and French elections would certainly suggest that for the moment at any rate, the wave of populist anti-establishment voting has lost some momentum.

It is interesting that the far right in Germany is in some turmoil at the moment and the odds of a Angela Merkel victory in September are quite good, but victory for Martin Schultz would not exactly represent a political earthquake, as he certainly would not represent much of a change in Germany’s role in Europe. It is becoming clear that electorates are looking across at Brexit and Donald Trump and deciding that they do not want any of that.

This weekend the EU-27 will meet to agree its negotiation stance ahead of the Article 50 negotiations with the UK. The French view will, of course, not be adequately represented this weekend, but if Mr Macron is successful next weekend, the shape of the EU-27 negotiating stance could be influenced in a significant way. Mr Macron is very wedded to the concept of the EU.

Hence, he is likely to adopt a hard-line approach to the EU and will not be inclined to agree to anything that could ultimately weaken the EU structures in the longer term. He has said that the four freedoms — the freedom of movement of goods, services, capital and people — are not negotiable and that waivers would not be possible for the UK or anybody else. Maintaining a strong EU will likely be more important to Mr Macron than keeping the UK sweet.

Somewhat perversely, this may suit the UK prime minister. By calling an election in June she aims to significantly increase her working majority and make whatever deals are necessary to achieve a good outcome for the UK, without fear of the many euro sceptics in her own party rebelling. They may, of course, rebel, but if her working majority is strong enough she will be able to defy them. This could mean that the chances of a ‘hard Brexit’ could be lessened by a solid victory for Theresa May and success for Emmanuel Macron. It is, of course, way too early to speculate about possible outcomes, but things are very definitely taking a modest turn for the better at the moment.

Despite all of these political developments, or perhaps because of them, the markets are in a seriously good mood at the moment. The euro has strengthened against the dollar, sterling is looking quite solid, and equity markets are roaring ahead. In the year to date most equity markets are in solid positive territory, helped of course by the continuing stream of relatively good economic news flow out of the US and particularly out of the eurozone.

UK retail sales were very week in the first quarter, but this actually represents good news in terms of possible Brexit outcomes. Retail sales have weakened because import-driven inflation on the back of sterling weakness is undermining disposable incomes and eroding real purchasing power.

If the UK economy had continued to hold up as strongly as it has done since the vote last June, it would give lots of courage to those who want a hard Brexit.

If the UK economy is seen to be suffering as a result of Brexit effects, then it would definitely weaken the hands of the ‘hard Brexiteers’ and deliver a softer outcome.

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