French election bumps Euro higher

Instreet Market and Economic Commentary

After a nail-biting campaign, the first-round of voting in the French Presidential election took place over the weekend with centrist Emmanuel Macron and euro-sceptic Marine Le Pen winning the most votes. The outcome stunned the established political parties which have no candidates running for the second round of voting (due to take place on May 7). The French people will now be choosing between two radically different visions for the country.

If Macron wins, he will be the first independent President of the 5th Republic in France. This would delight France’s EU partners and reassure investors. Indeed, the Euro initial response was to rise 2% to €1.0935 against the dollar— a five-month high.

World economy looking healthy

The world economy looks like it should expand at a healthy pace over the next two years if the latest forecasts from the International Monetary Fund (IMF) are anything to go by. Published on Tuesday, the figures saw the IMF nudge up its 2017 growth forecast from 3.4% to 3.5%, as it upgraded its forecast for Japan, the UK and Russia.

There has been a bunch of data released recently on global growth and world trade that paints a positive picture, such as:

  • The global goods trade was 2.4% higher in the three months to January, compared to the preceding three months
  • The composite PMI figure for the euro-zone reached a six-year high of 56.7 in April, which points to strong quarterly GDP growth of up to 0.7% for quarter two
  • According to flash estimates, Japan’s manufacturing PMI recovered from 52.4 in February to 52.8 in March. The survey's measure of output prices jumped from 50.1 to a three year high of 51.5, consistent with consumer prices rising again by nearly 1% year on year.

Despite these positive headlines, investors are losing faith in Trump and the prospect for world growth – the two pillars that have supported the equity market rally. With regards to Trump, investors are deterred by the President’s inability to push through tax reforms, deregulation and infrastructure investment. This is casting bearish overtones on what is otherwise an optimistic picture.

Chinese cloud of doom

China is hovering like a cloud of doom over global growth as investors are anxious that the world's second-largest economy may have peaked. The main concern is that Beijing's efforts to rein in a credit bubble will start to wear away at growth, precipitating corporate defaults and squeezing investment demand.

However, it needs to be emphasised that a peak in Chinese growth is unlikely to lead to a meltdown. This is especially the case because it is a politically important year for China, with President Xi Jinping set to preside over a change to the Communist Party's key personnel at the five-year congress.

Further, investors need to remember that there is a lot of incorrect reporting of China’s peak and that it may continue to reach new heights – just at a lower rate of growth.

If there are signs of fragility in the economy after June, we would expect the government to relax credit policies to kick start the economy.

Oil set to drop

Concern about China is one of the main reasons for the recent decline in key commodity prices, as China has been a key source of demand.

Oil is being hit further by a lack of market confidence in OPEC’s ability to overpower the resurgent US shale industry. Indeed, oil had its biggest weekly drop in a month, whilst  WTI and Brent benchmarks fell by more than 7% – their biggest falls since early March.

 

 

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