Commentary on financial markets – February 2017
Highlights:
- US: continued optimism due to expected economic support
- EU: concerns over further political developments
Commentary:
Under the banner of “no news, good news”, major US, European and Asian markets posted decent gains. Indeed, there was no major rate-setting information with global implications in February.
In the US, the stock rally continues, fueled by the expected actions from the new President Trump. In particular, massive infrastructure investment is expected, accompanied by tax cuts. This would benefit US companies in general and construction and energy companies in particular. In addition, the new US administration is going to invest more in its own military, which in turn helps the shares of arms companies. Last but not least, there are also changes afoot to so-called ‘Obamacare’, which is being welcomed by pharmaceutical and healthcare companies. Three interest rate rises are expected in the US this year. It is the impact of Trump’s new fiscal policy that will influence the level and speed of US interest rate rises. If the US economy takes off at an even faster pace and inflation rises, then we can expect more tightening of the now loose monetary policy.
European equities are attracting investors with their low valuations, but political uncertainties are preventing a faster rise in their prices. Major elections will be held in France and Germany this year, and nationalist parties opposed to the European Union are expected to strengthen. In addition, the UK is leaving the EU and it is not yet clear exactly what form Brexit will take.
Presidential elections in France
Marine Le Pen of the National Front is the front-runner in the first round of the French presidential election. The contest for the second place in the second round of the election is proving decisive. It is a very close contest between Emmanuel Macron and Francois Fillon.
In the second round, on the other hand, it will be harder for Le Pen, with her extreme views, to succeed, and the polls expect her to lose. The polls also show that in the second round, the Republican candidate Fillon would be an easier opponent than Macron of the En Marche!
In any case, the lead of Le Pen’s two biggest rivals for the second round, Francois Fillon of the traditional right and Emmanuel Macron of the centre-left, is shrinking. Moreover, the experience of the American elections teaches us that pre-election polls do not always correctly predict the outcome.
The National Front has set out two strategic changes. If it were to push them through, they would not only affect France. For example, the impact of the announced exit from the eurozone and the return to the franc would, according to Deutsche Bank analysis, be comparable to, if not stronger than, the fall of Lehmann Brothers, which in autumn 2008 triggered the biggest financial and economic crisis since the 1930s. On the other hand, the initial fears of Brexit or Donald Trump’s victory did not cause a big sell-off, on the contrary, in the latter case, they even kick-started the still ongoing growth.