Forget about Frexit

Published 25.04.2017 01:16

Financial markets breathed a sigh of relief late Sunday night as the French electorate gave Emmanuel Macron a plurality of votes in France's presidential election. Macron garnered 23.9 percent of the vote and was followed closely by Marine Le Pen who received 21.4 percent of the vote. Both candidates, by placing first and second, will face off in two weeks' time in a run-off to decide who will be the next occupant of the Elysee Palace. The CAC 40 index rallied to a nine-year high while the Turkish BIST 100 index rallied to an all-time high on Monday among other high-flying European equity indices. The euro also rallied to a six-month high of $1.09 to the common currency.

The rejection of "establishment candidates" signals a willingness from the French to abandon old habits and take a risk on the former finance minister who may help alleviate France's economic woes. Unlike neighbor Germany, the French have systemic youth unemployment issues and their economy is suffering from a post Great Recession malaise that has only seen income inequality grow. Macron who has never been elected to public office was branded as "the other" candidate, one whose disapproval ratings were the lowest among the four major candidates and therefore won by being the least hated. While it is still possible that Le Pen may pull off a win if disenfranchised centrist and left-wing French voters stay home in two weeks, it is highly unlikely.

Macron's win is great news for Turkey as the future of Turkey's accession talks to the European Union are no longer in question, that is, if Turkey still actually wants to join the EU. Macron also has signaled a more dovish tone in fiscal policies, which may help the EU regain its pre-2008 strength. Currently Turkey's largest trading partner, Turkey needs a strong European marketplace to sell its exports to. The Europeans, simultaneously, are in need of a strong Turkey to export their goods to while also using Turkey as a buffer zone that will prevent refugees from claiming asylum in European countries.

Macron was in favor of bailing out Greece during "Grexit" and is very much pro-EU. A stronger showing for Le Pen, in the 30-plus range, would have made her a contender in the run-off putting financial markets on edge. The outcome of this first round of voting, however, has put investors at ease as the most important election of 2017 has practically concluded in a very pro-EU outcome. From here, Macron needs only to cross the 50 percent line and he will be the next president of the Fifth Republic, as he is on track to do, with polls putting him at near 65 percent.

Turkey's markets continued to rally following a strong post-referendum week with the Turkish lira rallying to TL 3.59 to the dollar. Should this level hold this week, it would be the best week for the Turkish lira in 2017. In debt markets, the 10-year long-end Turkish government bond traded at six-month highs, signaling a return of capital to Turkish debt markets. The benchmark BIST 100 equity index trades up, over 17 percent in U.S. dollar terms year-to-date, making it one of the best performing indices globally.

With saber-rattling in the Korean peninsula abating as China apparently steps in to cool nerves, U.S. President Donald Trump can return to dealing with rolling out his domestic fiscal policies, which include a major infrastructure investment program. Should this plan fail to get traction in Congress, the U.S. Federal Reserve may find itself in a precarious position. With inflation slowing, the Fed will be unable to raise interest rates the two to three more hikes it had said it planned to. This will cause the U.S. dollar to continue to weaken, which would actually be great news for Trump and the U.S. economy in general. Equity markets will continue to rally as the greenback weakens globally.

The influx of cheap U.S. crude thanks to shale oil has put a $60 ceiling on global crude prices. Low energy costs, coupled with a stronger Turkish lira and a strengthened eurozone is exactly what Turkish markets need to move higher. Stability in financial markets coupled with a de-escalation of political uncertainty in the form of reaching across the aisle in a show of unity will translate into Turkey returning to the global stage as a magnet for foreign direct investment.

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