Monica Defend, Head of Global Asset Allocation Research,Pioneer Investments’
Emmanuel Macron and Marine Le Pen have won the first round of the French Presidential elections. Opinion polls are now forecasting a significant victory for Macron in the run-off, as he has already received an endorsement from two of the losing candidates – the republican Fillon and the socialist Hamon. Macron has a track record as a reformer and is a European enthusiast so this first round result is likely to be market friendly. We reiterate our constructive outlook towards risk assets, particularly European equities, but consider some safe haven assets – the 2 year Shatz in particular – to be extremely expensive and inconsistent with a reflation narrative. We continue to see the resurgence of volatility as a key risk, given the number of geopolitical challenges still at play and therefore believe investors should continue to keep hedging in place.
What is your view of the first round results of the Presidential election in France?
It was an absolutely unprecedented first round, with four contenders quite close in the polls and just one of them (not ranked among the strongest) belonging to a traditional party. This unpredictability added to the scares and fears of the market. A run-off between the first round winners, Macron and Le Pen, however, can still be thought as maintaining an element of the traditional left vs. right fight without raising the issue of representation, maintaining an element of the traditional left vs right fight to a greater extent than a different outcome may have. The risk of having a president that is explicitly disliked by a significant majority of French voters is lower.
What outcomes do you now expect for the second round?
At the moment, market can breathe a (brief) sigh of relief that the outcome of the vote was largely as expected (although an element of uncertainty will likely remain for the next two weeks ahead of the final round of voting): Emmanuel Macron (at 23.86%) and Marine Le Pen (at 21.43%) won the first round of the presidential elections; Macron has already gained the support of both Fillon (the gaullist candidate, who obtained 19.94% of the votes) and Hamon (the socialist candidate that get only 6.35% of the votes) for the second round. Melenchon (19.62%) said he will not give his support to either of the two candidates. Nonetheless, the formation of the so-called Republican Front (i.e. an alliance in the run-off election between socialists and republicans/gaullists versus Le Pen’s party) has already happened. Such an alliance has prevented any significant electoral success for the Front National (FN) in recent years and has led to a scant representation in the National Assembly for the party. In addition, it must be said that the polls were fairly accurate in predicting actual results, with the first 5 candidates in the range of 1- 1.5% from the numbers seen in the week before the elections. The same polls were suggesting that Macron will win the run-off election in two weeks’ time by a wide margin (60%-40%). In the end, it can be expected that left-to-center voters will largely choose Macron in the run-off, with only an element of center-right voters adding their support to Le Pen. This is clearly a market friendly scenario. Macron is a European enthusiast and also has a positive track record, as a minister, of being a reformer.
Do you see this result impacting on the economic outlook for Europe?
A stronger impetus in advancing the construction of Europe will surely be beneficial. We know there are still a number of things in which a stronger integration, or at least a stronger coordination, will help to take advantage of being part of a currency union (which is still partially untapped). This outcome will also have a short-term impact: stronger support for European actions coming from one of its leading countries will help shape policies and clarify objectives. This will also help confidence in general and will help push corporate investment, thereby reducing medium-term risks.
Taking a broader perspective, what is your current assessment of geopolitical risk in Europe?
The interaction between national elections and the need to reshape and reform Europe is an ongoing feature of this year; although now the Dutch election and, hopefully, also the French one seem to have cleared the potential hurdles to this process. Current polls suggest that the populist, right wing party (Alternative für Deutschland) in Germany is losing momentum, therefore it can be asserted that risks coming from the political arena are reducing. However, there is still some uncertainty related to Greece, even though a tentative political agreement was reached before Easter. What remains to be solved is political uncertainty in Italy, but this is likely to be a theme for 2018.
How can investors deal with the evolving geopolitical framework within a Multi-Asset approach?
We expect this electoral outcome to be well received by the market– bringing a relief rally in European equities and spread tightening across European peripheral bonds (including French OAT). We remain constructive on risk assets, especially equity, based on a benign growth and inflation outlook. Overall, we favour Europe and Japan, reflecting the improvements in the macroeconomic backdrop and relatively attractive valuations. We consider some safe heaven assets – the 2 year Shatz in particular – to be extremely expensive and inconsistent with a reflation narrative.
However, we continue to see the resurgence of volatility to be a key risk, given the number of geopolitical challenges still at play. Against this backdrop, we believe that investors should continue to keep hedging in place through volatility strategies, US Dollar exposure and Gold.
Sunak warns of bill to be paid to tackle Britain’s ‘exposed’ finances – FT
(Reuters) – British finance minister Rishi Sunak will use the budget next week to level with the public over the “enormous strains” in the country’s finances, warning that a bill will have to be paid after further coronavirus support, according to an interview with the Financial Times.
Sunak told the newspaper there was an immediate need to spend more to protect jobs as the UK emerged from COVID-19, but warned that Britain’s finances were now “exposed.”
UK exposure to a rise of one percentage point across all interest rates was 25 billion pounds ($34.83 billion) a year to the government’s cost of servicing its debt, Sunak told FT.
“That (is) why I talk about leveling with people about the public finances (challenges) and our plans to address them,” he said.
The government has already spent more than 280 billion pounds in coronavirus relief and tax cuts this year, and his March 3 budget will likely include a new round of spending to prop up the economy during what he hopes will be the last phase of lockdown.
He is also expected to announce a new mortgage scheme targeted at people with small deposits, the UK’s Treasury announced late on Friday.
Additionally, the government will also announce a new 100 million pound task force to crack-down on COVID-19 fraudsters exploiting government support schemes, it said.
(Reporting by Bhargav Acharya in Bengaluru; Editing by Leslie Adler and Cynthia Osterman)
G20 promises no let-up in stimulus, sees tax deal by summer
By Gavin Jones and Jan Strupczewski
ROME/BRUSSELS (Reuters) – The world’s financial leaders agreed on Friday to maintain expansionary policies to help economies survive the effects of COVID-19, and committed to a more multilateral approach to the twin coronavirus and economic crises.
The Italian presidency of the G20 group of the world’s top economies said the gathering of finance chiefs had pledged to work more closely to accelerate a still fragile and uneven recovery.
“We agreed that any premature withdrawal of fiscal and monetary support should be avoided,” Daniele Franco, Italy’s finance minister, told a news conference after the videolinked meeting held by the G20 finance ministers and central bankers.
The United States is readying $1.9 trillion in fiscal stimulus and the European Union has already put together more than 3 trillion euros ($3.63 trillion) to keep its economies through lockdowns.
But despite the large sums, problems with the global rollout of vaccines and the emergence of new coronavirus variants mean the future path of the recovery remains uncertain.
The G20 is “committed to scaling up international coordination to tackle current global challenges by adopting a stronger multilateral approach and focusing on a set of core priorities,” the Italian presidency said in a statement.
The meeting was the first since Joe Biden – who pledged to rebuild U.S. cooperation in international bodies – U.S. president, and significant progress appeared to have been made on the thorny issue of taxation of multinational companies, particularly web giants like Google, Amazon and Facebook.
U.S. Treasury Secretary Janet Yellen told the G20 Washington had dropped the Trump administration’s proposal to let some companies opt out of new global digital tax rules, raising hopes for an agreement by summer.
“GIANT STEP FORWARD”
The move was hailed as a major breakthrough by Germany’s Finance Minister Olaf Scholz and his French counterpart Bruno Le Maire.
Scholz said Yellen told the G20 officials that Washington also planned to reform U.S. minimum tax regulations in line with an OECD proposal for a global effective minimum tax.
“This is a giant step forward,” Scholz said.
Italy’s Franco said the new U.S. stance should pave the way to an overarching deal on taxation of multinationals at a G20 meeting of finance chiefs in Venice in July.
The G20 also discussed how to help the world’s poorest countries, whose economies are being disproportionately hit by the crisis.
On this front there was broad support for boosting the capital of the International Monetary Fund to help it provide more loans, but no concrete numbers were proposed.
To give itself more firepower, the Fund proposed last year to increase its war chest by $500 billion in the IMF’s own currency called the Special Drawing Rights (SDR), but the idea was blocked by Trump.
“There was no discussion on specific amounts of SDRs,” Franco said, adding that the issue would be looked at again on the basis of a proposal prepared by the IMF for April.
While the IMF sees the U.S. economy returning to pre-crisis levels at the end of this year, it may take Europe until the middle of 2022 to reach that point.
The recovery is fragile elsewhere too. Factory activity in China grew at the slowest pace in five months in January, and in Japan fourth quarter growth slowed from the previous quarter.
Some countries had expressed hopes the G20 may extend a suspension of debt servicing costs for the poorest countries beyond June, but no decision was taken.
The issue will be discussed at the next meeting, Franco said.
(Additional reporting by Andrea Shalal in Washington Michael Nienaber in Berlin and Crispian Balmer in Rome; editing by John Stonestreet)
Bank of England’s Haldane says inflation “tiger” is prowling
By Andy Bruce and David Milliken
LONDON (Reuters) – Bank of England Chief Economist Andy Haldane warned on Friday that an inflationary “tiger” had woken up and could prove difficult to tame as the economy recovers from the COVID-19 pandemic, potentially requiring the BoE to take action.
In a clear break from other members of the Monetary Policy Committee (MPC) who are more relaxed about the outlook for consumer prices, Haldane called inflation a “tiger (that) has been stirred by the extraordinary events and policy actions of the past 12 months”.
“People are right to caution about the risks of central banks acting too conservatively by tightening policy prematurely,” Haldane said in a speech published online. “But, for me, the greater risk at present is of central bank complacency allowing the inflationary (big) cat out of the bag.”
Haldane’s comments prompted British government bond prices to fall to their lowest level in almost a year and sterling to rise as he warned that investors may not be adequately positioned for the risk of higher inflation or BoE rates.
“There is a tangible risk inflation proves more difficult to tame, requiring monetary policymakers to act more assertively than is currently priced into financial markets,” Haldane said.
He pointed to the BoE’s latest estimate of slack in Britain’s economy, which was much smaller and likely to be less persistent than after the 2008 financial crisis, leaving less room for the economy to grow before generating price pressures.
Haldane also cited a glut of savings built by businesses and households during the pandemic that could be unleashed in the form of higher spending, as well as the government’s extensive fiscal response to the pandemic and other factors.
Disinflationary forces could return if risks from COVID-19 or other sources proved more persistent than expected, he said.
But in Haldane’s judgement, inflation risked overshooting the BoE’s 2% target for a sustained period – in contrast to its official forecasts published early this month that showed only a very small overshoot in 2022 and early 2023.
Haldane’s comments put him at the most hawkish end among the nine members of the MPC.
Deputy Governor Dave Ramsden on Friday said risks to UK inflation were broadly balanced.
“I see inflation expectations – whatever measure you look at – well anchored,” Ramsden said following a speech given online, echoing comments from fellow deputy governor Ben Broadbent on Wednesday.
(Editing by Larry King and John Stonestreet)
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