Yet more tests lie ahead for Europe. Emmanuel Macron’s victory in the final round of the French election was a substantial non-event since markets were already reflecting the positive outcome after the first round.
We now await the French legislative elections scheduled for June 11th and 18th, the outcome of which will inevitably affect the thrust of the new president’s reforms. A parliament bent on change and capable of furthering the reforms announced during the campaign could allow the Macron effect to continue affecting prices. In any case, a glance ahead at the second half of the year shows that there are no particular surprises in store on the political front. This is especially true when we compare it to the second half of 2015, which aw both the Brexit vote and Donald Trump’s win in the US presidential election.
In the meanwhile, especially in the United States, the debate on reflation goes on as we seek to understand to what extent the Trump trade can continue. To a large extent, this will depend on whether the new administration is able to implement the tax stimulus measures that it promised. In turn, tax reform intersects with monetary policy, and interest rates are still extremely low and we know that they can’t go back from these levels, but it’s not clear how quickly they will rise. If Trump’s plan is implemented, it would justify Janet Yellen’s Fed to take a slightly more aggressive stance. Vice versa, another round of disappointments and delays in tax reform would enable the FOMC to take a laxer course of action. This uncertainty creates more space for Europe at this point in time. Not to overlook the debate on how to cover the Fed’s budget, which, after three rounds of quantitative easing, has expanded exponentially to 3.5 trillion US dollars, five times its 2007 level. For now, the only thing to do is shelve the issue and work out a solution later.
In Europe as well, Mario Draghi seems to be dragging his feet. When the patient stops taking his medicine, it’s usually a sign that he’s recovered. However, the fact remains that the European Central bank continues to administer its ultra-expansive treatment, implying that there are still risks on the horizon. I don’t expect to see any real progress in the normalization of monetary policy until this cycle of elections is over, i.e., until the German vote.
At the same time, in Europe, quarterly results are excellent. This is true for Italy too, where, on average, they have been a pleasant surprise. The financial segment is also showing encouraging signs. However, let’s not overlook the growing divide between the banks that did their homework – and cleaned up their balance sheets – and those that have more work to do. The more conscientious banks are finally beginning to benefit from the progress that they’ve made.
By Massimo Trabattoni, Head of Equities for Italy at Kairos, for AdvisorPrivate’s Italian Times column.