The Weekly View (4/24/17)

What’s On Our Minds:

Writing a post about French elections and the structure of the European Union might be a bit overdone, but that is what’s on not just our but everyone’s minds this week. Last July, we wrote about Brexit in our quarterly newsletter. Undoubtedly we’ll talk more about Europe in the next one, as well. For now, let’s do a quick refresher on how France’s elections seem to mean so much for Europe- and the US.

Centrist candidate Emmanuel Macron pulled ahead in the weekend’s primary election results, signaling his likely win in the runoff election. The markets responded overwhelmingly positively, with the Euro’s value rising 1.8% on Sunday against the dollar. Macron was so warmly welcomed by the markets because his opponent, far-right candidate Marine Le Pen, would mean further nationalist tumult in the EU and another step toward its breakup.

The European Union is flawed, to be sure. We are not the first to point out that a monetary union (everyone uses the Euro) without a fiscal union (not everyone treats the Euro the same in their budget) means that some countries (i.e. Germany) feel that they are subsidizing the bad financial habits of others.

Also stirring Europe’s electorate is the rise of nationalism, not just in the EU but around the world. France is especially pressured by these thoughts, with the country having had far and away the most religiously-motivated terrorist activity in the recent past. The BBC shared the top five countries for terrorist arrests:

Chart showing arrests for terrorism inspired by religion

However, the EU is, at least for now, the law of the land. A disruption would call into question important trade agreements, investment flows, tariffs, and more. It’s not certain if each tradeoff would be good or bad for the US in the long run, but that’s one thing the markets really hate: uncertainty.


Last Week’s Highlights:

It was a choppy week in the markets as investors processed political headlines and first quarter earnings reports from various companies. By the end of the week, major indexes were in the green.  Investors are hanging in there, even with tensions in North Korea, the French election, and some doubts over whether President Trump can deliver on campaign promises.  On Friday, stocks bounced off session lows when Trump announced he will make a “big announcement” on tax policy this Wednesday.


Looking Ahead:

Investors are preparing for the busiest week of first quarter earnings season.  More than 190 S&P 500 constituents report this week, including large components Alphabet and Microsoft.  Housing data, including new and pending home sales, will be reported on Tuesday and Thursday.  Along with earnings and economic data, investors are also anticipating big news on tax reforms from President Trump on Wednesday.  Then on Friday, first quarter GDP will be reported.  Analyst and traders will be busy digesting all the information which could lead to another choppy week in equity markets.