The Eurostox index reached depressed December levels last year when many market participants feared that an anti-euro government might be elected in the Netherlands or France. It rallied to a high in May of this year, putting on around 20%. Markets anticipated the French election result and relaxed about the immediate prospects for the Euro. Since then the index has fallen back a little to 3468. It remains below its April 2015 high of over 3800.
Meanwhile for the UK investor there have been gains to be made on the Euro itself. The single currency fell from its highs of 2013 of around 1.14 to the pound, to reach a low of 1.44 in July 2015, rallying to 1.26 in June 2016 prior to the UK referendum. The pound fell on the result. The euro has since risen back to the 2013 level and now sits at 1.11. Much of this volatility has to do with perceptions of the euro, worries of political risk, offset at times by the policy of the European Central Bank (ECB) which has been very accommodative for most of that period.
Markets have relaxed about the euro area since the French election. The decisive win… meant the euro was safe
Markets have relaxed about the euro area since the French election. The decisive win for President Macron and his new party meant the euro was safe in the second largest economy in the zone. Macron’s friendly approach to Chancellor Merkel and the departure of the UK from the EU suggested a new era of close Franco-German collaboration taking the bloc further into political as well as economic union. The new French leader hinted that he would stick to tough budget disciplines to impress his German ally, and would concentrate on structural reforms to try to lift the sluggish French growth rate. France would be more prominent at the top table, but Germany would be writing much of the script. These were policies designed to boost EU share markets and likely to boost the currency as well, despite the loose money policy.
Macron excited many in markets by his proposals to relax French labour market laws, cut some taxes and make France a more attractive place for business in general and for inward investors in particular. True to his word, he has pressed ahead with the first phase of labour market reform. The legislation passed the Senate as well as the Chamber of Deputies. The President’s new law will streamline negotiating channels in the workplace, encourage more matters to be settled at the level of the individual firm, cut the time taken over Tribunal cases concerning dismissals, and cap compensation paid.
All has not gone as well as he would like in other ways. Early on he lost four Ministers who had to resign following allegations about conduct. Three were members of the MoDem party, supporters of the President. This party denies accusations about misuse of public money in the European Parliament, but has to respond to them. His close political ally Richard Ferrand had to resign over separate allegations about his past financial conduct. All this was particularly damaging to Macron who had made much of the need for a new moral drive in French politics to clean out the bad old ways of the established main parties.
President Macron has added to the disillusion of voters by his wish to create an office and official role for his wife as First Lady. This has gone down badly because Macron has been a hawk over demanding that MPs in France no longer employ their wives and family members in their offices to help them, with public money for their salaries and expenses. The Republican party candidate Mr Fillon was badly damaged by arguments about the employment of his wife during the Presidential election. Macron’s opponents think it hypocritical for him to want a different approach for his own wife. She already benefits from staff and security support as wife of the President, as former Presidential spouses have done. Macron wants something more like the American system. Chancellor Merkel’s husband does not get any such special treatment.
Does any of this matter? Markets are more concerned about the extent to which Macron puts through the labour market and other reforms needed to boost French growth. The problem is the political noise has badly damaged his poll ratings. His approval level is already on minus 13, with only 36% liking what he is doing. This is a very low rating for so early a phase in the Presidency. The more unpopular he becomes, the more he will lack political support to carry through challenging reforms. For the time being he can legislate as he won a good majority in Parliament. He also needs to sell the reforms to the wider French audience, including the Unions, who are not keen on what he is trying to do.
We have probably seen the best of the French share rally on the news of the Macron victory and the evidence of some reform. We are not turning negative, but no longer see political change as a positive driving markets higher. This low in the polls, there is more political risk around. From here the progress of French and euro area shares rests more heavily on the economic recovery and earnings growth by companies.
The above article was first published by Charles Stanley on 11th August 2017