Politics And Economics In The Week Ahead

The results of the French presidential election will be known prior to the open of the Asian session. No doubt the outcome will spur an initial knee-jerk reaction, but barring an outright victory for Le Pen, which seems highly unlikely, or the left candidate Melenchon coming in second place, which also seems improbable, the market’s reaction will likely be short-lived.  

While there is, of course, a certain amount of anxiety, especially given the electoral surprises over the past year, investment community seems not overly worried. Large speculators in the currency futures have been amassing what Bloomberg calculates as a record large long euro position. The premium investors demand over Germany is elevated but has not accelerated as the election drew near.  

Very quickly after the election results are known, the market’s attention will turn to the French parliamentary elections in June. Neither of the top two presidential candidates, Macron, and Le Pen, have a presentation in the current French parliament. They will need other parties’ support, and the configuration of parliament is just as crucial as the president, if not more so, for French policy going forward vis a vis the EU and EMU.  

Many seem to be treating the recently announced UK election as a foregone conclusion. The Tories will increase their majority. While it seems true in a narrow sense, it may be politically naive. The Tory Party, after all, is a coalition. Doesn’t the impact of the election results depend on which Tories win? Some observers linked sterling rally on the announcement to ideas that it could produce a softer Brexit. That seems to be to assume what one must prove. Couldn’t soft Brexit Labour MPs be replaced by harder-line Tories?  

Before getting to the national election, local elections will be held on May 4. English, Welsh, and Scottish councils will be chosen, as will the newly created English Regional Mayors. Labour goes into the contest with the most council seats overall (1535 vs. 1136 for the Tories). The results will be scrutinized to see clues into the national contest. A significant loss for Labour, as some are predicting, will likely spur talk of Corbyn stepping down, and demoralize and further weaken the main opposition party.  

Not yet on many radar screens, and yet potentially of great importance, is the open primary for Italy’s ruling PD (April 30). Recall the fact that the primary was set in April spurred a fissure in the coalition that makes up the party and the spinning off of part of the left-wing split off. It had accused Renzi of taking the party to far to the right. We have warned that Italy’s election next year may be more of a threat to the EU and EMU than this year’s Dutch, French and German contests.