Relief echoes through markets at Macron election

New French president Emmanuel Macron

MUCH attention has been focused on the EU recently. The Presidential elections in France have been dominating headlines and of course the tricky subject of Brexit is never far from the media's thoughts.

On Sunday we saw the moderate candidate Emmanuel Macron sweep convincingly into office, beating far-right Marine Le Pen by capturing two-thirds of the vote. Relief has echoed through markets, as perceived political risk has eased considerably and in the run up to Sunday's vote we have seen a strong “risk-on” rally in the euro and European equity markets, led by cyclical sectors as well as an easing in the French bond yield spread.

This appears to have slowed the momentum behind the populist momentum that has claimed victories in the US and the UK and represented a substantial risk to the very existence of the EU.

However much politics dominate the news, it is always vital to not lose sight of the underlying economic reality. With this in mind, Europe certainly has its attractions: recent statistics show leading indicators point to better growth in the Eurozone in the second quarter and corporate earnings have continued to improve. This encourages the view that cyclical recovery is finally developing in Europe.

Inflationary pressures remain subdued and for now the ECB's asset purchase programme remains in place. In addition the EU could stand to benefit substantially from Brexit as rumours abound of relocations to mainland Europe of (in particular) financial institutions, the latest being Standard Chartered.

In contrast, having dominated headlines for so long, news from the US has now gone rather quiet. Having notched up 100 days in office, President Trump has yet to make a huge impact in economic terms. The long awaited tax reform plan was unveiled recently, but the plans appear to be long on ambition and short on detail.

Much hinges on whether the US growth rate will pick up after a rather lacklustre first quarter, otherwise in very general terms the tax cut proposals outlined will substantially increase the budget deficit and are likely to run into strong opposition. Markets may lose patience with Trump's ability to stimulate the economy.

Closer to home the UK is facing election fatigue as we are facing yet another election next month. For the next four weeks we are unlikely to have much of a break in the domination of political headlines as speculation mounts that Theresa May will increase the Conservative's majority in the Commons, thereby endorsing her mandate for Brexit negotiations.

The truth is none of us really know what the UK post Brexit will look like, but the tone of the negotiations will remain a key focus for markets and in particular sterling, which remains a highly significant factor in the UK's economic wellbeing.

We therefore find ourselves at a very interesting point at the beginning of the summer: one of the most well-known stock market sayings is “sell in May and go away…” But with so much on the agenda across the globe this might mean missing out on market opportunities.

:: Cathy Dixon is a director at the Belfast office of Cunningham Coates Stockbrokers, a trading name of Smith & Williamson Investment Management (SWIM). This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of SWIM.

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