Milan From waiting for the second round of the French election to entering the White House, the financial market is in a delicate stage. After the first Trump-Biden presidential debate.
Paul Jackson is global head of asset allocation research at Invesco, an investment firm with $1.1 trillion in assets. So far, markets have reacted calmly to the first round in France. What will be the impact of the vote? What is the outlook for the weekend?
The results were “less bad” than expected the day before. Macron Egypt Melenchon A stop In the battle for seats to slow down the Republican advance, he reassured markets that don’t like extremism. Both sides. The recipe for the left front includes some $150 billion in additional spending over many years, lower retirement age, higher taxes, and a possible tug-of-war with the European Union. The right is equally worrying for different reasons. Even if Le Pen limits her demands, there are fears of a “truss moment”, a promise to reduce taxes on individuals and companies that runs counter to the desired fiscal consolidation. And with a deficit of 5.5%, Paris simply can’t afford it. In addition to possible tensions with the European Union over immigration policy.
Where will we fall at this moment?
It seems difficult to entrust Bardella with a minority government, just as it is difficult to get enough support for a majority government. A center-left coalition is more likely to stop the Republicans, without forgetting the possible but more distant votes between the far right and the Republicans. A technical government is the most likely solution, without forgetting what happened in the Netherlands, Belgium or Spain, or the continuation of an executive with very limited powers. My impression is that France may find itself pushing the problem even further.
In recent days, there have been rumors that the ECB might intervene if there is a turbulence in interest rate differentials. Do you think this is possible?
Draghi has made a strong case that central banks can do this. I believe that if necessary, the ECB will step in to stem any possible unrest.
Why is Italian BTP suffering increasing losses in these tense moments?
Italy has a high stock of debt, but it has demonstrated its ability to maintain primary budget surpluses to keep debt under control over the past few years. The financial crisis and subsequent pandemic undermined these efforts, but I believe real efforts were made in terms of budget discipline. Clearly, concrete work is needed to achieve results. But I believe that it is better equipped to address these issues than a country like France, due to historical habit. Overall, Italy, like other European countries, faces demographic changes that will only exacerbate the debt burden in the coming decades. Unfortunately, governments tend to look to the immediate future without revealing to voters that their short-term promises mean either default or increased taxes and reduced public services in the long run.
The Melloni administration will have to develop a difficult strategy. Do you think he will be able to confirm tax cuts and wedge cuts, or are there other priorities?
I won’t go into technical and political details, but in this budget situation, tax cuts are certainly not necessarily a good move. Spending control must be a priority. The impact on growth remains to be seen. It would be better to find a way to support it, reduce bureaucracy and free up the ability of companies to grow and innovate.
It’s also an election year in the US. What do you think of the Biden vs. Trump race? What impact will it have on the market?
In bitter joke, I would say that this debate confirms that the choice will be between a troubled president and a lying president. Let’s imagine that Trump wins and the House of Representatives is in his favor. The outlook for the US economy is tax cuts, rollbacks on climate commitments and tariffs across the board. But Trump is wrong to think that he is targeting China only in this way: Chinese citizens will also pay the price of very high tariffs and higher prices.
What are the implications for the Federal Reserve?
The US has a huge budget problem, is a serial producer of deficits, and is heavily indebted to the world. But they have the privilege of holding the world’s reserve currency. The problem is that Trump has eroded that advantage by undermining confidence in the Fed and its independence, driving up funding costs. While stocks may appreciate Trump, the bond market has already begun to price in that risk, as well as the risk of inflationary policies, as yields rise.
What are the prospects for a rate cut?
I am surprised that the Fed has not already started doing this, given the slowing economy and falling inflation. If he does not do it in July, I believe it will not happen before the November election. Still, two rate cuts this year are plausible, as the market predicts. The ECB is on track, although official statements in recent days seem aimed at easing expectations about the next move. I believe there will be one more rate cut this year, and a 75 basis point drop in 12 months.
Markets are recovering from a strong semester, especially Wall Street. Will it stop?
The trajectory of the US stock market is set by a handful of large-cap stocks. Growth is not as broad-based. Europe and Japan have also done well, and China has recovered somewhat. Many other asset classes have also done well. Today, European stock valuations are at a greater discount to US stock valuations than at the peak of the dot-com bubble. I believe that growth stocks have reached a level of growth that will be difficult to sustain in the coming years. Artificial intelligence and chips have been the hot topics in recent months. The challenge now is to understand when AI can become a productivity enhancer that can spread throughout the economy, rather than just benefit a few companies. While chips are a preeminent cyclical industry, historically it has been made up of strong growth and rapid declines: I don’t think we can imagine unlimited growth, even for Nvidia.