ITHURBIDE Philippe , Global Head of Research
BLANQUE Pascal , Group Chief Investment Officer
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We have repeatedly mentioned how financial markets have tended to overestimate the risks of European elections, underestimate the fears of the Brexit and overestimate hopes on Trump’s economic policy. We can even say that this theme has strongly guided our asset allocation choices and our macro-hedging strategies. Well, here we are...
French elections reassure
Market relief was significant, in an environment in which, nevertheless, the negative scenarios were not really ‘predicted’, probably proof of relative serenity in the run-up to the elections, or a sharp underweight on France or a wait-andsee attitude. There was no resolutely hostile stance, despite the race leading the drills of Marine Le Pen, then the disappointments of François Fillon, the rise of Jean-Luc Mélenchon, and finally the fears of a scenario Le Pen - Mélenchon in the second round. Overall, the impact on the French and European markets has been limited. But on several points, including the elimination of extreme risk (a duel between Le Pen and J.-L. Mélenchon, a top score of M. Le Pen in the first round in particular), and the elimination of European systemic risk Frexit, to summarize), the first round of the elections has produced a long-lasting trend. As in Spain, Italy, Austria and the Netherlands, there will probably not be a populist party in power in France. The difficulty will be for Macron, if elected, to win a majority in the next parliamentary elections (11 and 18 June), or he will have to compose a coalition government with allies that can come from left and right. The stakes are great, and wait until mid-June for final answers.
For now, because of the disappearance of extreme risks to Europe in particular, a return to French fundamentals is needed, and this will make it possible to highlight a tangible reality:
Trump disappoints ... and it’s probably not over
Trump still delivers strong speeches and comments, of course, but with a quite limited ability to carry out its “reforms”. After the setback of the removal of the Obamacare, everyone was waiting for tax reform. It took time, because the positions of Congress are firm. Trump nevertheless announced a few days ago a historic cut in taxes, the largest since the 1980s (Ronald Reagan). Presented as self-funded, it still needs to be approved by Congress. This will not be easy because, if it is self-financed in D. Trump’s and its Administration’ mind (the resulting growth will make it possible not to deteriorate public finances), it is not funded in the economic sense, and according to the references of Congress: an expansionist measure has to find concomitant financing (for example, a reduction in spending) and not a delayed financing. Trump’s dialectic is close to that of R. Reagan, but it is no longer usable today: the starting point of Trump’s mandate has nothing to do, in terms of deficits and debts, with the starting point of R. Reagan, while the main measures favour the most affluent businesses and incomes, which is not to the liking of very many delegates, who have already made it known:
3 key words for Trump’s tax reform:
We can adhere to such principles, but we see that aid to the most disadvantaged households is not at the centre of the reform, on the contrary. Will these reforms be adopted by Congress as it stands? Quite frankly, we can doubt it. Of course, the risk is to have a great disappointment on the “repricing” of growth, the victim of which would be the American stock market, whose valuation is already deemed excessive.
The Brexit will be a difficult exercise for the UK
The leaders of the 27 European countries (EU without the British) have recently unanimously adopted the main principles of the forthcoming negotiations with the United Kingdom on Brexit. This may seem surprising given the past divisions, but the special Brexit summit of April 29 showed the unity of the Union. “Directions adopted unanimously. The firm and fair mandate of the EU-27 for talks on the Brexit is ready, “according to D. Tusk. “We are ready and we are united,” said the head of European negotiators, Michel Barnier, who also excluded any trade negotiations as long as “significant progress” has not been recorded on key issues.
On his arrival in Brussels, François Hollande had warned London that the Brexit “would necessarily have a cost for the United Kingdom”. “Europe will defend its interests”.
Wolfgang Schäuble, recalled that the United Kingdom would not benefit from its divorce with the EU once the negotiations on the Brexit had been completed. “There is no” free lunch “. The British must know it “, Schäuble said. “We do not want to weaken the UK. But we do not want the rest of Europe to be weakened. The UK, after leaving the EU, should not get benefits that other countries would not have “. Meanwhile, Angela Merkel recalled that the British must not “make illusions”.
What are the next steps?
What else should be retained in the past month?
The French elections and Trump’s fiscal plan were undoubtedly the most important events of recent weeks, but our attention was drawn to other significant elements:
What should we look at now?
This return to the fundamentals of the French economy must not make us forget the international environment:
Amundi’s asset allocation is broadly unchanged:
The extreme risks have disappeared
Back to fundamentals... and it’s good news
Essential measures favour the most affluent businesses and incomes, which is not to the liking of many congress participants
Trumpflation: beware possible disappointments
We are ready and we are united
We do not want to weaken the UK. But we do not want the rest of Europe to be weakened
World trade is no longer a global growth engine, but in some areas, including Asia, growth still benefits from trade
Global reflation at the heart of expectations: it determines the sustainability of (excessive) valuation of US equities and the direction of monetary policy
Trumpflation and Fed... a crucial combination
We remain very cautious towards the GBP