Daily Comment (June 19, 2017)

by Bill O’Grady, Kaisa Stucke, and Thomas Wash

[Posted: 9:30 AM EDT] Global equity markets are rising this morning, although the weekend news was mixed.  Here’s a recap:

Macron dominates in France: Emmanuel Macron, the recently elected president of France, solidified his new government with a solid win, capturing 350 of the 577 seats in the National Assembly.  For a party that didn’t exist before the election, this was a remarkable achievement.  The center-right held 135 seats, representing the opposition.  The Socialists, who had a majority in the previous government, were reduced to a mere 45 seats.  The National Front, led by Le Pen, won only eight seats while the far-left won 17 seats.  It should be noted that the turnout was very low; it isn’t clear if the turnout dropped because voters saw Macron’s win as inevitable and decided to stay away from the polls, or if they were in despair that a good outcome was not possible.  Macron describes his policies as “muscular centrism,” but they look to us like neo-conservative.  He is pushing deregulation and lower taxes.  Although such policies are on shaky ground around the world, France never really had a Thatcher-Reagan revolution and so having one now would not be unusual for France.  Still, we suspect the low turnout reflects more of a rejection of politics in general and, if that is the case, Macron may face more opposition than this vote would indicate.

Syrian warplane shot down: A U.S. F-18 shot down a Syrian military jet that was bombing rebel positions.  These rebels have U.S. support.  Russia indicated this morning that it would now treat U.S. aircraft in the region as hostile.  There has been a concerted effort by the U.S. and Russia to avoid air confrontation but, as IS continues to wither, the war is now shifting away from IS onto the ultimate fate of the Syrian regime.  We note that Iran fired missiles into Syria over the weekend to attack IS in retaliation for the recent terror attack.  We are seeing a clear escalation in this region which is a concern and points to the rising likelihood of a broader conflict.

Apparent terrorism in London: Yesterday, what appeared to be a terror attack occurred in London, this time directed against Muslims.  A vehicle drove into a crowd leaving a mosque.  These attacks serve to further undermine the PM just as talks begin with the EU over Brexit.

Chinese regulators tout commodities: The China Securities Regulatory Commission indicated it will loosen limits on how much commodity exposure commercial banks, insurance companies and pension funds can have.  It isn’t completely obvious why this policy is being proposed but it may be as simple as trying to distract investors from Chinese property markets.  The commission did indicate it wants to see deeper futures markets; perhaps the increased investment exposure would develop those markets but we doubt investment firms would offer a two-way trade.  We will continue to closely monitor commodity markets to see if Chinese flows show up in any meaningful way.

Vancouver real estate woes: Canadian financial regulators are taking a much closer look at residential lending practices as it appears loose collateral rules may be part of the lending boom.  There are reports that some loans may have been made against collateral in China, which would be rather problematic to seize in case of default.  Canada avoided a real estate crisis in 2008 but it may be facing one now.[1]

Where millionaires flee: New World Wealth, a market research firm, has published its most recent report which offers some insight into capital flight.  In 2016, the top five nations with the most fleeing millionaires were France, China, Brazil, India and Turkey.  The favorite destinations for this capital flight were Australia, the U.S., Canada, the UAE and New Zealand.[2]  As global tensions rise, we could see more capital flight in the future.

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[1] http://vancouversun.com/news/local-news/vancouver-real-estate-in-the-red?cn=bWVudGlvbg%3D%3D&cn=cmV0d2VldA%3D%3D

[2] http://www.marketwatch.com/story/this-country-is-no-1-for-millionaire-migrants-and-its-not-the-us-2017-02-27?link=sfmw_tw