Expect relief rally on a probable Macron win, but beware the implications of the forthcoming UK election in June
French Presidential elections are stacked against the extremes, as was the intention. Round one provides the electorate with the illusion of choice as they favour their particular candidate. By round two however, the vote is more likely cast with a view to exclude their least favoured candidate. As long as one centrist candidate can get through to the second round, he/she can expect to win. Had it been the nightmare scenario pairing of Melenchon & Le Pen, then tomorrow’s market opening would have been pandemonium. As it was, the bookies favourite pair off for the final round of Macron and Le Pen came through, which with Macron already leading, makes his election a better than odds on favourite. While those looking for change will be disappointed, the EU establishment (and no doubt also the ECB) will be delighted to have this keen Europhile and ex-Rothschild banker installed in the Elysee Palace. What this also promises is a further hardening of the battle lines over Brexit. As a representative of the French financial lobby, Macron will be eager to damage the City’s market position, perhaps under the mistaken belief that this will be to Paris’s benefit and has already advocated a hard Brexit. Theresa May’s decision to call an early General Election meanwhile promises to fortify her domestic position and that of the Tories in Parliament in her forthcoming negotiations with Brussels.
As I have said before, these negotiations will be ugly and protracted. The EU’s sclerotic structure requiring unanimity amongst its members makes even the simplest of trade treaties a nightmare to conclude. In addition to this is the asymmetry of interests of the often unelected EU bureaucrats conducting the negotiations and those who they purport to represent who feel the consequences. Junker and his ilk may wish to punish the UK and damage the City’s financial economy for its temerity in rejecting their embrace, but it won’t be them losing their jobs if the UK reciprocates. Unfortunately, the more the Eurocrats believe the UK is bluffing, the less likely it will be for them to alter their stance. At some point, the EU will have to be disabused of this assumption, perhaps when German auto workers or French fisherman start worrying about market access and their own jobs. The sooner this is done the better and I believe it is for this reason that Theresa May is seeking a renewed and stronger mandate in the forthcoming General Election. If I am correct, then we should expect some ‘shock and awe’ soon after. Markets will bleat and there will be dire predictions by most of the pundits, but that is the nature of a negotiation; making your opponent believe you’ll walk away from the table, which often means being prepared to do just that.
European equity markets (and Euro) may experience a relief rally on the expectation of the maintenance of the status quo. Enjoy it, because then comes the UK election and possibly soon after comes the fireworks.