Daily Comment (May 8, 2017)

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

[Posted: 9:30 AM EDT] Emmanuel Macron won a resounding victory in Sunday’s French presidential elections, winning 66.1% to 33.9%, an even bigger landslide than polls suggested.  Le Pen did do well in the de-industrializing north and in the anti-immigrant south, but she struggled elsewhere.  To win, Le Pen needed the left-wing populists to vote for her; instead, they either voted for Macron or abstained.  In addition, as we have seen in other elections, right-wing populists are never enough of an electorate to win outright.  The candidate must also gather support from establishment right-wingers and Le Pen apparently failed to gather support from the establishment right.  Abstentions were 27% of the ballots, suggesting a rather disappointed electorate.

The next political event will be legislative elections next month.  Current polls suggest Macron’s emerging party will get 24% of the seats, with the center-right attracting 22%.  The National Front is expected to grab 21% of the seats, with the left getting 28%.  The remaining 5% tends to go to fringe parties.  It isn’t clear if Macron can form a majority with his followers and the center-right, so the lack of power in the legislature could hamper his ability to press his deregulation platform into law.

Although the major media is trumpeting Macron’s win as a triumph over populism, we doubt this election will signal the end of the movement.  It is important to remember that Jean-Marie Le Pen lost the 2002 presidential election 82.2% to 17.8% to Jacques Chirac.  So, even though Marine Le Pen was soundly beaten, her numbers improved dramatically in 15 years.  If Le Pen had been able to build a message that attracted the center-right, which is what Trump was able to accomplish, the outcome might have been much different.  On the other hand, the “Nader coalition”[1] of the populist left and right failed to materialize in France and has mostly failed everywhere.  But, that doesn’t mean it could never occur.

Market reaction to the Macron win was anti-climactic.  Given Macron’s lead in the polls, the financial markets had discounted his win by seeing European equities and the EUR rise into the vote.  Consequently, we are seeing long liquidation of positions, leading to a weaker currency and lower equities this morning.

Saudi Arabia and Russia have signaled that the current production cut agreement could be extended into 2018.  Our position is that the Saudis will take the Draghi option (“do whatever it takes”) to prop up oil prices into the Saudi Aramco IPO next year.  The primary beneficiary will be U.S. domestic oil producers who will benefit from higher prices and the ability to gain market share from these overseas producers.

China’s foreign reserves edged higher, up $20.4 bn to $3.029 trillion.  The Chinese government has been successful in cutting outflows from China, bolstering reserve numbers.  Although the trade data (see below) was a bit better than expected, it came mostly from falling imports.  Commodity imports were especially disappointing, with crude import volumes down 15.8%, petroleum products down 3.4%, copper off a whopping 25.1% and iron ore down 13.0%.  The drop in commodity imports is a major negative for commodity-producing nations as it suggests that the Chinese economy may be slowing.  There are growing worries about China’s debt load.  The FT[2] quotes a World Bank study warning that state and local government borrowing is growing despite regulatory efforts to curtail debt growth.  These government entities are using the shadow banking system to lend to special purpose vehicles to expand borrowing and skirt regulatory hurdles.

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[1] Nader, R. (2014). Unstoppable: The Emerging Left-Right Alliance to Dismantle the Corporate State. New York, NY: Nation Books.

[2] https://www.ft.com/content/799a1afa-3135-11e7-9555-23ef563ecf9a?utm_source=The+Sinocism+China+Newsletter&utm_campaign=7796306811-EMAIL_CAMPAIGN_2017_05_08&utm_medium=email&utm_term=0_171f237867-7796306811-29661833&mc_cid=7796306811&mc_eid=e77499fecc (pay wall)