Han Dieperink: An American debate and two elections

June 25, 2024

The coming weeks will be busy on the election front. It starts next Thursday in the US with the presidential debate. The first round of the French elections will take place this weekend. The British elections will take place next Thursday, while the second round of the French elections will follow the following weekend. In the past, financial market elections were usually a non-event. Of course, there were always sectors that benefited when a particular party won elections, but broadly speaking there was an evolution rather than a revolution in terms of policy. That is different nowadays. Globalization has many winners, but also some clear losers. The middle class in developed markets now has to compete with the emerging middle class, mainly from Asia. This is becoming less and less successful and dissatisfaction is increasing as a result. It has caused polarization in politics. Not so much between left and right, but between the elite and the people. Populists have gratefully taken advantage of this. Due to this new division, major policy changes increasingly follow elections.

Many elections in 2024

Never before have there been so many elections in one year as in 2024. It is possible that the French elections will lead to a euro crisis, but in a few weeks it will probably be 'possession, end of entertainment.' After the European elections, in which right-wing parties have gained considerable ground, as expected won, Emmanuel Macron called new parliamentary elections. In France, the parliament and president are elected separately. Since the fifth republic (1958), the president has had a lot of power thanks to De Gaulle, but just like in many other countries, it is nice to govern when parliament and president have the same color. President Macron will basically have another 3 years in office. He hopes that he can attract more parties with these midterm elections. It is possible that Macron hopes that Le Pen's party will make a mess of things in the coming years, so that he can gain popularity as president.

Coalition already did not have a majority

The coalition around Macron already did not have a majority in parliament and would probably not survive the upcoming budget talks. In the French district system, a candidate must receive at least 50% of the votes. If this is not available in the first round, candidates who achieve at least 12.5% ​​may participate in the second round. This system ensures that the parties in the center often emerge victorious and that it is difficult for Le Pen's Rassemblement National to obtain a majority in many districts. The outcome that the market fears most is not Le Pen's win or a coalition with Le Pen and of course not any possible win for Macron either. The market mainly fears that the extreme left will become part of the coalition against RN. Communists, the Greens, and many socialists in France are quite anti-capitalist. In this case, this means that all of Macron's reforms will be at stake (pensions, the labor market, etc.), that companies will be allowed to pay more taxes and that the government will nevertheless spend much more than it takes in. It will only become a problem for the euro if the ECB has to intervene to finance France when the country cannot get its fiscal house in order. The ECB then buys French government bonds, also to prevent any further contamination. However, the chance of such a scenario is not that great, so that is why it will probably be "possession, end of fun" after July 7.

Can Trump surprise again?

The election debate between Joe Biden and Donald Trump will be on CNN on June 27. When Trump won the 2016 election, it came as a surprise, even to himself. The market reacted positively quite quickly, because Trump's policy had far-reaching positive consequences for the economy, for financial markets and for investors. Deregulation, lower taxes, and a level playing field in international trade: they were good for the American economy. This time it will probably become clear well before November who the likely winner of the American elections will be. At first Trump had the best hand, but gradually the cards for Biden are improving. Now Biden is in the lead and with the help of Taylor Swift he could easily win. Financial markets will probably only start taking the election forecast into account after the two parties' conventions. The Republicans' convention is in mid-July and the Democrats' convention is in mid-August. The US stock market normally performs above average positively in election years. There is also regular summer rally during election years. If Trump wins, sectors such as energy, aviation, defense and banks will benefit. The market also seems to have a preference for Trump. If Biden wins, alternative energy stocks, healthcare and consumption-related stocks will benefit. If Trump wins, he's not there yet. For issues such as taxes and deregulation, he remains dependent on a majority in Congress. That will probably remain uncertain until the last moment.

Sunak's mistake

It is still not clear why Rishi Sunak brought forward the date of the British elections. His economic advisors may have thought that this was the time to strike in terms of inflation. On July 4, the British can go to the polls and it looks like it will be a resounding victory for Labor. In the short term, this could mean fewer interest rate cuts from the Bank of England. A Labor government is likely to significantly increase the salaries of many civil servants. During the 14 years that the Conservatives were in power, they lagged far behind the development of inflation. Furthermore, Labor will also want to reverse the economic effects of Brexit as much as possible. The United Kingdom could rejoin the European Customs Union and thus gain a status comparable to Turkey. The next step is further access to the European market to a status comparable to Norway and Switzerland, provided Labor is still at the helm.

In short, exciting weeks.

More columns by Han Dieperink