The Macron win was widely expected so market impact is likely to be modest. It does however set in place the dynamics for continued strength at the margin for European stocks and the euro which had been rallying since his win in the first round.
Even though expected, Macron’s win represents an important victory in Europe’s search for a durable expansion. Too often in recent years, self-inflicted wounds ranging from monetary policy hesitation, to the Greek Debt Crisis, to Brexit, have created unnecessary headwinds and higher risk premiums. Europe has taken a much needed step back from the brink.
In the near term ,the election is unlikely to have any significant impact on policy at the ECB. However, with Frexit off the table, Draghi can focus solely on inflation developments without having to look out of more political missteps.
While the outcome was clearly a step in the right direction, it is far from clear that Macron will be able to deliver a majority block in parliament which may significantly limit his impact. The divisions across France, and Europe more broadly, still exist. Extremism was blunted but not eliminated. France has simply followed the medical credo, “First, do no harm.”
Between Trump and the UK referendum, populism seemed to be sweeping across the developed world. Ironically, Trump’s turbulent start and the realities of a “hard Brexit” have provided a cautionary tale to voters across Europe. Candidates from either the right or left extremes have failed to win or gain much traction since the US election.
The French election represents a win for EU continuity and integration. As Le Pen risk passes, the next hurdle for the EU project is likely to be the Italian banks which remain mired in non-performing loans and poor capital positions with little political stability to address the problem. Macron’s victory is hardly the “all clear” signal for Europe.
While far from compelling in the grand scheme, European equity valuations look reasonably attractive relative to the U.S. Combined with recent economic momentum and rising earnings, the fading discount of political risk may finally allow European shares to outpace US stocks after lagging for most of the last 6 years.
With each turn away from EU disintegration, the future of synchronized global growth relies more heavily on Trumponomics to deliver. While the underlying fundamentals of the global economy remain solid, failure to deliver his much anticipated tax package could produce a correction in US shares which have already priced in some success. More importantly, while France has side-stepped upheaval for now, a US government shutdown or debt ceiling debacle may represent the next self-inflicted economic wounds.
