How Windy Is It . . . ? Monday, 8th May 2017 – No.228
The French election is the obvious topic for discussion this week; following last night’s votes, France will welcome their youngest ever President-elect, Macron. Despite a lower than expected turnout of 75%, Macron won convincingly against Le Pen, who conceded a 66.1%/33.9% defeat. We believe Macron’s win is a boon for France and a positive for Brexit negotiations going forward. Mrs May was quick to congratulate Macron as was Mrs Merkel and The Donald; and they were in good company, as Donald Tusk, President of the European Central Bank (ECB), thanked French voters “for choosing Liberty, Equality and Fraternity over the tyranny of fake news”. The sense of relief was palpable. Macron is an avid supporter of the EU and top of his agenda are proposed reforms to the governance of the Eurozone, a common fiscal policy, a joint finance minister, a Eurozone debt instrument and completion of a banking union. This will be music to the ears of the ECB who will be undoubtedly supportive of this type of agenda. It seems we are now over the first key European political hurdle of 2017, the second is the German election in September. Whilst the Eurozone pauses for breathe, it is now full steam ahead for Macron, who will now need to name a Prime Minister with appropriate experience to lead the lower-house election campaign and manage the daily business of parliamentary politics; all of which is required before Macron’s inauguration which needs to happen before 14th May.
Moving away from politics, although both are related; the VIX, a measure of the market’s expectation of volatility, closed at its lowest level since February 2007. If we put this in context, since the inception of the VIX in 1990, the level has only been lower on 14 occasions. A low VIX is indicative of a relatively calm outlook on equity markets and conversely, a high VIX, is indicative of fear and worry in equity markets. On first glance a low VIX seems desirable, however, we remind ourselves that the last time the index was so low was prior to the Great Financial Crisis. We believe it is important not to become complacent with the index at such low levels and based on valuation, there is still a strong case for being invested in equity markets.
Last week, there were a myriad of data releases mostly from the US and Eurozone. US ISM manufacturing data for April was softer than expected but still in expansionary territory falling from 57.2 to 54.8. The US employment report was generally strong; data showed falling unemployment and strong job growth. This is broadly positive news for the US but may make the next policy move for the Fed more difficult; whilst there was no rate rise in May, a hike too far over the next few months could cause the US economy to falter. Eurozone data was positive with April PMI data hitting a six-year high. Early GDP estimates are also supportive of a sustained Eurozone recovery growing by 0.5% in Q1 2017. This positive news on growth puts Europe on a good footing for policymakers to begin discussions for phasing tapering later in the year.