Let's try to chart the course for the next five months. Given that in the last two years we have become accustomed to the calm or, at the very least, to slow drifts carefully governed by central banks, it will be good to give us a strong pinch, not to be distracted by the upcoming holidays and prepare with maximum concentration for an extraordinarily demanding 2017 .
The first big change we had in America with Trump. Dollar, stock exchanges and bonds have reacted, but much remains to be understood and done. The second big change can come with the second round of the French elections of 7 May. At 8 in the evening of that day we will in fact know if a neo-Thatcherian France will give a powerful shock of energy to the whole continent or if a lepenist France will lead to the dissolution of Euroland and the return of national currencies in a climate of high and prolonged instability.
Il Italian referendum it will be important locally and will decide how much margin of political autonomy will remain in our hands or how much more we will be commissioned by Berlin, Brussels and Frankfurt. If the no wins and if on the same day we see a radical right-wing president take office in Austria, we will hear for some time talks about the populism that is now rampant throughout Europe, but neither the Italian nor the Austrian vote will entail immediate systemic risks.
even the dutch vote of March 15 will not produce radical changes. Wilders earns two points a week in the polls, but it cannot be ruled out that he will arrive in time for an absolute majority. The Netherlands has a strictly proportional system and in the last poll three days ago Wilders was awarded 33 virtual seats out of 150. His is the first party but all the others will unite to leave him in the opposition. For its part, Germany, which will vote in September, has remained the only country in which the polls are still working very well and Merkel appears undisturbed in command until 2021.
The only decisive vote for the survival of the euro between now and spring 2018 (when Italy will vote again) is therefore the French one. Barring surprises, Fillon and Le Pen will go to the ballot. Fillon is a Gaullist, but he has nothing in common with the statist Gaullism of De Gaulle or Chirac, nor with the falsely liberal one of Sarkozy. Indeed, he argues that France, as it stands, is destined to implode and proposes an ultra-liberal Thatcherite cure as the last chance to save it. Since from the Merovingians to today France has been liberal only under Louis Philippe d'Orléans (plus some phases of the Third Republic) one can well understand the disruptive scope of Fillon's speech. So disruptive that the electorate of the left could even prefer the statist Le Pen and let her win. Le Pen no longer calls for an immediate exit from the euro but is fighting for a negotiated and orderly dissolution.
Even if the model is a negotiation Brexit type however, it seems legitimate to have doubts about how ordered such a process could be. If we now move to the other side of the Atlantic we see the conditions for the Trump stock rally to be extended not only until the day of the official settlement, January 20, but also for the first hundred days of the new administration.
The news flow from the White House and Congress in February, March and April will be relentless and intoxicating, at least from a stock market perspective. The planned tax cuts alone will be enough to raise the indices' earnings per share by 10 percent. To this must be added the plan for infrastructure and the grand relaunch of buy-backs by companies that will repatriate capital held abroad. Heavenly music, divine harmonies. The strong dollar and the Fed won't spoil the party for some time. Mind you, the dollar will still strengthen, albeit not by much, and the Fed, hopefully, will hike rates three or four times between now and the end of 2017.
THEinflation, for its part, it will continue to rise, but in the early days its health will be read as a sign of the general health of the system. At a certain point, it is clear that the weight of interest rates and the dollar will join doubts about the valuations achieved and doubts about the sustained rise.
The French election could be the occasion for a global correction just before the vote. In the event of Fillon's victory, Europe will replace America as the engine of the share price increase and will recover a large part of the gap accumulated in the previous months. In wallets it is now a matter of choosing between the American and the European path.
La american street it's made up of the dollar, non-defensive stocks, and inflation-linked government bonds. We believe it will give good satisfaction for the whole of the next two years, but will express its best in the next four-five months. Next week, in the event of a general correction due to the Italian vote, it will offer the possibility of buying the American stock market with a small discount compared to the highs of recent days, then everything will have to be held until spring.
La European road is more bumpy and risky because it forces you to move between unknown binary policies that are beyond the investor's control. In return, it offers lower valuations, a 2017 of decent economic growth and some scope for earnings growth thanks to the competitive euro and expansionary fiscal policies.
Regarding the latter, the difference with America is that infrastructure programs and tax cuts there will be proudly displayed and will create optimism, while in Europe budget overruns will continue to be the subject of recriminations and blame that will depress morale. Ideally we would see a clear bullish directional choice for the American part of the portfolios while the European part should be managed, at least until May, in a long/short perspective between countries and sectors.
