Rise of the extremes: “the markets prefer a united Europe to a Europe of every man for himself”

Posted Apr 6, 2022, 4:34 PM

Why is the narrowing gap in the polls between Emmanuel Macron and Marine Le Pen worrying the markets?

International investors are particularly attentive to the pro-European or Eurosceptic stance of candidates, whether for elections in France, Italy or Germany. The markets prefer a united Europe to a Europe of every man for himself. For the bloc to exist against other major powers like the United States or China, governments must have compatible approaches to defence, economic policy or fiscal policy.

Do these concerns seem strong or moderate to you at the moment?

Some anxiety appeared on Tuesday when reading the latest polls on the second round, but in the eyes of investors the risk remains contained. In fact, they do not only look at the presidential elections, but also the legislative elections. They know that in France, Parliament is decisive. Even if, which is unlikely, Marine Le Pen were elected, she would still have to have a majority in the Assembly to carry out her policy. This is why the “spread” |interest rate difference, note]with Germany is widening but without reaching its 2017 level, for example.

Under what conditions could political risk make a lasting return to the markets?

What matters to markets is the business environment and the ability of companies to generate profits. The link between politics and markets is generally not very strong, but it happens that certain personalities come to disturb this framework. Donald Trump, for example, generated anxiety at the start of his mandate, then with the reduction in corporate taxes he was seen as pro-business, and finally he changed the balance by disrupting Sino-American relations. .

Is the geopolitical risk still as high as at the beginning of the war in Ukraine or have the markets already become accustomed to the situation?

Geopolitical risk has taken center stage in European markets since the beginning of the year. But now, it is above all its main consequence in economic matters, the negative price shock linked to raw materials – energy, metals, agricultural raw materials – which worries investors. The main problem is that the US Federal Reserve (Fed) has initiated a rapid and quite aggressive monetary tightening, even as the global economy is exposed to several headwinds. In addition to the war in Ukraine, there are the difficulties of China in coping with the new wave of Covid and the problems of its real estate sector, for example. It remains to be seen how the economy at the global, American or European level will react.

Is there a risk of the US bond market slipping?

The Fed has announced its intentions and initiated the movement, but it continues to surprise the markets. Witness the last words of Governor Lael Brainard. They were very aggressive even though she is rather known for her dovish positions on monetary policy. At the end of the first quarter, American long rates reached levels expected for the end of the year at more than 2.50% and it is unclear where this will end. For now, the bond market seems to be looking for itself.

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