So it’s Macron v Le Pen, as the polls predicted. And so, the logic goes, as the polls show Macron steadily beating her in a 65% v 35% showdown, we can be all but certain that Emmanuel Macron will be the next President of France. A man who has never held elected office before; who effectively ran as an independent; who comes from a business background. If you’re looking for parallels to Trump, look no further.
Some claim the failure of Le Pen in France and Wilders in the Netherlands to poll better is a sign that the EU hasn’t signed up for the populism that’s ‘sweeping’ the UK and the US. This would be to misunderstand the sentiment that’s doing the sweeping. It’s a clean brush that the voters are desperate for. Out with the old, in with the new. Get rid of the establishment. They’ve failed. They profiteered as they preached austerity to those with less power. The tremors from the financial crisis continue. There’s a straight line from the Occupy movements to the complete restructuring of politics across the globe, driven by the deliberate asset-price bubbles stoked by the world’s central banks as they boosted the already asset-rich 1%. Macron is just the latest instalment.
The problem for the new independents is that they can struggle to govern: legislating requires gaining support and consensus. They may have got into power on a wave of anti-establishment sentiment but they need to use the institutions of the establishment to exercise that power. Hence Theresa May calls an election in order to shore up her position. Macron needs his almost inevitable coronation to deliver a momentum that puts his newborn party into pole position in June’s legislative elections. Meanwhile Trump now has to spend next week trying to prove he’s achieved something in his first 100 days – and avoid a government shutdown while doing so.
This means that political risk isn’t going away. But it is changing. We have seen that the polls are more reliable when they forecast proportional systems – they slipped up over electoral colleges and first-past-the-post but were within the margin of error on the UK referendum and much better on the Dutch and French votes. The market is learning from this. But now it must learn how governing actually takes place.
We’ve already been into and out of Trumpflation euphoria; the Obamacare repeal and mishandled executive orders mean we’re now questioning just what the President can actually get done. Next week, if the shutdown comes to pass, we will see just how hard it is when a party turns in on itself. In the months to come, we could see the UK Conservative Party suffer a similar fate: just because Theresa May will likely end up with the biggest majority in decades, doesn’t mean she won’t face further brickbats from within it. If anything, the absence of an opposition might embolden the party’s internal opposition.
These lessons are yet to come. For now, the market will be relieved. It is still wedded to the narrative of the past 10 years: what are central banks doing and what does that mean for volatility? In other words, how much of the carry trade can I have on? And we just knocked down one big event risk, so hurrah, fill your boots, buy the dip, sell vol, wear diamonds. The biggest winner from this weekend will likely be the South African Rand or the Mexican Peso.
What would throw this off course?
- An overly hawkish ECB on Thursday – they will likely sound optimistic about the economy, but by the time they speak, German yields could have spiked significantly higher as event risk is unwound
- That aforementioned US Government shutdown – and disappointment over Trump’s bigly tax reform plans that he has lined up for his first 100 days
- A resurgence by Le Pen in the 2nd round polls – This will likely happen at some stage
- Macron has ended tonight being endorsed by every single establishment figure: in an anti-establishment mood, could this hurt him?
- Could those who released details of Fillon’s corruption turn instead to Macron and unearth some disturbing facts?
- 41% of the 1st round votes were for extremist parties – Macron can’t rely on the “left-wing” Melenchon voters naturally to turn to him, but will they turn to Le Pen or will they abstain? (charts below from the FT in March and Ipsos on Friday)
In the very short term, the Euro may be prone to buy rumour/sell fact – this was the outcome the market had expected and there will be a weekend gap to be filled which could take the Euro back down again. But the positive impact on risky assets will continue – until the aftermath of these political earthquakes becomes better understood.