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Daily Intelligence Briefing – June 13, 2017

FEATURED TOPIC: FRANCE EMBARKS ON A NEW REVOLUTION, BULLISH FOR EQUITIES 

A game-changer is unfolding in France. In an unexpected development, the party of the newly-elected president, Emmanuel Macron, stands to win a sweeping majority in the National Assembly. Macron’s group is expected to capture between 415-455 seats out of 577 in the lower house of parliament, the biggest majority since 1993. Not only does this mark the end of an era of dominance for France’s mainstream parties, it gives the new president the power to push through his plans to tackle France’s three long-standing problems: high unemployment, low growth, and a large national debt.

Macron’s economic recipe calls for labor reform, a re-structuring of the tax system, and a combination of spending cuts and stimulus. His plans are particularly pro-business and include a proposal to cut France’s corporate tax rate from 33% to 25%, which is the EU’s average. Furthermore, he would like to relax labor regulations, giving companies more freedom to negotiate pay and working hours. The unemployment rate in France is 10%, and part of the trouble is that employers have been reluctant to hire on the concern that they would be stuck with expensive benefit payouts and high taxes even if the employee does not work out. Macron has also signaled his willingness to cut 120,000 jobs from the civil service by not replacing retirees that vacate those posit ions.

It will certainly be a challenge to push through some of these changes, especially on the labor side: France is notorious for its strong union culture, and any attempts at reform often lead to massive demonstrations and strikes. However, the parliamentary majority will at least give Macron’s administration a good chance to legislate some of these proposals.

With this major political change, France has the best chance in years for an economic revival. The brighter outlook and business friendly policies could attract large amounts of capital to the French economy. A more vibrant economy will benefit companies geared towards domestic consumption and investment in France, as well as multinationals with strong French exposure. The appointment of environmental activist, Nicolas Hulot, to head energy policy is expected to be good for renewables, bad for nuclear. Meanwhile, an acceleration of real GDP could help boost earnings growth and lift French equities. 

IN THE MEANTIME, here are the latest articles on the subject (these stories are summarized in the POLITICS & POLICIES Section):

  • France – France Is on the Verge of an Astonishing Political Transformation
  • France- France has best chance in years for economic revival. It still won’t be easy
  • France – Merkel-Macron axis to prove pivotal for global investors
  • France – Election win puts Emmanuel Macron on course to redefine European politics
  • France – French energy transition on track as Macron cements power base in parliament  


OTHER STORIES HIGHLIGHTED IN TODAY’S DIBS:

  • Markets: 
    • Bonds – Britain’s credit rating at risk after general election outcome
    • Bonds – Fading political risk helps France and Italy’s bonds 
    • FX – When Currencies Fall, Export is Supposed to Follow – Until Now 
  • Economics and Trade: 
    • Trade Wars – Trump’s steel import curbs could blow up global trade rules  
  • Finance: 
    • Banks – Subordinated debt at small Spanish banks feels the heat
    • Lending – Amazon lends $3B to Marketplace merchants, banking on their growth
    • M&A – British political uncertainty risks slowing M&A, dealmakers say
  • Real Estate:
    • CRE – The Mall of the Future Will Have No Stores
    • CRE – These Cities Have Too Many Stores, and They’re Still Building 
  • Technology: 
    • VR – Chinese will use 86 million virtual headsets within five years
  • Transportation:  
    • AVs – Shipping Giants Are Looking to Self-Piloting Boats to Shift Cargo 
    • AVs – Volvo deploys self-steering truck in Latin America  
  • Commodities: 
    • Gas – Qatar crisis to speed the rise of Asia’s spot LNG trade 
    • Oil – India is Opec’s litmus test on oil demand growth
    • Oil – Qatar Renews Commitment to OPEC Oil-Cutting Strategy 
    • Oil – A Shale-Oil Boomtown Climbs Back From the Bust
  • Endnote: 
    • Bitcoin Triples the Since Start of Year to Flirt With $3,000

CURRENT MRP THEMES

  Defense (L)   Gaming  (L)    Oil Services & Equipment  (L)    U.S. Energy  (L)
  CAPEX  (L)   Gold  (L)    Steel (L)    U.S. Financials  (L)
  Cybersecurity  (L)   Homebuilders  (L)    TIPS  (L)    U.S. Regional Banks  (L)
  Emerging Markets  (L)   India  (L)    Long-Dated Treasuries (S)    Value over Growth  (L)

About the DIBs: MRP focuses on identifying transformational change in the global economy and offering an investment thesis whenever an opportunity arises that has not yet been recognized by the market. The DIBs are MRP’s compilation of articles and data from multiple sources on subjects reflecting disruptive change that have potential investment implications for an industry or group of securities. We share these with our clients who may already have or may be considering exposure in the industries affected. The subjects change daily and constitute an excellent update on featured topics. 

   MAJOR DATA POINTS Top   
  • United States, Treasury Budget, MoM, MAY: $-88.4 B from prior $182.4 B
  • Denmark, Inflation Rate, YoY, MAY: 0.8% from prior 1.1%
  • Turkey, GDP Growth Rate, YoY, 2017Q1: 5% from prior 3.5%
  • China, Vehicle Sales, YoY, MAY: 0.2% from prior -2.2%
  • Italy, Industrial Production, YoY, APR: 1.0% from prior 2.9%
  • India, Industrial Production, YoY, APR: 3.2% from prior 3.8%
  • India, Inflation Rate, YoY, MAY: 2.18% from prior 2.99%
  • India, Manufacturing Production, YoY, APR: 2.6% from prior 2.4%
   MARKETS Top   

Bonds – Britain’s credit rating at risk after general election outcome 

International rating agencies, closely monitoring the situation in the UK, have warned the country’s creditworthiness faces a downgrade after the Conservative Party’s failure to win a majority in Thursday’s general election. According to the agencies, the UK’s election result could delay negotiations with the European Union over its exit from the bloc and throws the future path of its economic policy into doubt.

S&P currently rates the UK at AA, with a negative outlook. The country was stripped of its triple-A rating immediately after the Brexit referendum last year. The negative outlook means Britain is at risk of future downgrades. The UK holds the second highest rating Aa1 from another agency Moody’s. It had held the rating since 2013 when it was downgraded from AAA due to sluggish growth prospects and fiscal challenges. The third major rating firm Fitch has yet to comment on the election results. RT

Bonds- Fading political risk helps France and Italy’s bonds 

On sovereign debt markets, yields on French and Italian 10-year debt are falling, as a more benign political outlook in both countries draws investors in to buy bonds. France’s 10-year yield is down 4 basis points at 0.60 per cent and Italy’s is down 7bp at 2.02 per cent. Yields fall when prices rise. The rally comes after President Macron’s party is on course for a clear majority in parliament after national elections at the weekend. Meanwhile, Italy’s Eurosceptic Five Star Movement failed to make the run-off in a series of municipal elections on Sunday. FT 

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FX – When Currencies Fall, Export is Supposed to Follow – Until Now 

Economists and government officials are increasingly wondering if that effect is diminishing, especially among advanced Western economies with shrinking manufacturing capacity and supply chains increasingly interwoven with the rest of the world. The new idea is that much of the benefit from a falling currency is offset by the higher prices paid for components imported from overseas.

The U.K. is emerging as a test case for whether globalization has diminished the effect. Although its currency has been battered by the financial crisis, the Brexit vote to leave the European Unionwhich took place a year ago June 23and the country’s fresh bout of political uncertainty, its exporting power hasn’t responded as textbooks might suggest. Chemicals made at Chemoxy International Ltd.’s factory in Middlesbrough are worth about 20% more in the export market after last June’s fall in sterling, given the beefed-up value of the currencies used to buy those goods overseas. Higher costs for imported materials, however, all but erased that advantage. British businesses ranging from car makers to food processors to lumber mills are discovering the same thing. WSJ 

*

   ECONOMICS AND TRADE Top   

Trade Wars – Trump’s steel import curbs could blow up global trade rules 

The Trump administration launched two investigations earlier this year into imports of steel and aluminium. Just recently, related those investigations, President Trump cited Section 232 of the Trade Expansion Act of 1962. Section 232 allows US presidents to restrict imports of products into the US if they are deemed to be a threat to national security. In the world of trade, that makes it a “nuclear option”. The WTO’s national security exemption was designed to be invoked only in times of war and to cover things such as sanctions. It has been used rarely, and never really tested legally at the WTO. Mr Trump and Wilbur Ross, his commerce secretary, are now threatening to upend all that.

 In opening the investigations, Mr Ross pointed to the small number of plants left in the US making the sort of steel or aluminium needed by the US military for building ships, tanks and the like. The US steel industry also is calling for a broader interpretation of national security, arguing that if it can’t be protected from Chinese and foreign competition and be a viable US domestic industry, then it can’t provide the steel the American military might need in times of war, or to build the roads needed to defend the nation, or to build the pipelines that carry the oil needed to fuel the military.

Trade wonks are worried that if Mr Trump proceeds with the sweeping national-security-driven tariffs, major US trading partners would be likely to retaliate. The EU might introduce its own restrictions on US steel. China could decide to use national security as an excuse to ban imports of US grains and other products. Any affirmation by a WTO panel of the US’s right to impose broad tariffs on national security grounds would open the door to other countries doing the same. Yet, any rejection of the US’s right to do so could give Mr Trump cause to pull out of the global trade body.  FT

  POLITICS & FISCAL POLICY Top   

France – France Is on the Verge of an Astonishing Political Transformation

President Emmanuel Macron expanded his control of French politics as voters put his party on track to a sweeping majority in the National Assembly in the first round of legislative elections, ousting establishment stalwarts in the process. In an alliance with the centrist MoDem party, Macron’s group will have between 415-455 seats out of 577 in the lower house of parliament. The results would give Macron the biggest majority in the Assembly since 1993, and offers the 39-year-old president the power to push through his recipe for fixing France over the next five years.

Sunday’s result marks the end of an era of dominance for France’s mainstream parties. Almost all of the Socialist Party’s parliamentary heavyweights were eliminated. The Republicans are slated for their smallest number of seats in decades while the National Front, despite Marine Le Pen reaching the presidential runoff against Macron, may get between one and five seats. With a majority in parliament and hundreds of lawmakers who are completely new to politics, the president would hold extensive control over the levers of government.

What’s more, the opposition parties who might ordinarily lead the resistance to Macron and his prime minister, Edouard Philippe, are embroiled in extensive rebuilding after each suffered unprecedented defeats during the presidential vote. “Emmanuel Macron has redrawn the French political map,” former Danish Prime Minister Anders Fogh Rasmussen said on Twitter. He and his party have “a generational chance to deliver reforms.” B 

*

France- France has best chance in years for economic revival. It still won’t be easy

The French economy has suffered through years of anemic growth, high unemployment and budget deficits. Macron’s plans could break the spell. He has promised to relax the country’s rigid labor laws, cut corporate tax and bring down budget deficit by trimming France’s huge public sector. Capital Economics said the reforms could add between 1 and 1.5 percentage points to GDP growth over the course of his presidency.

Unemployment in France is running at 10%, and the country’s strict employee protection rules are partly to blame. Economists have urged French leaders to soften the rules for years, and Macron might find it very difficult to win over the French public. “Like many presidents before him, he is likely to face strikes and protests against planned increases in working hours and flexibility regarding pay which may force him to water his reforms down,” McKeown said.

Macron also wants to drastically change how the EU operates. He wants the eurozone to have a common budget, parliament and government. He also wants the ECB to issue common European debt which would be used for investment. He will have an extremely hard time selling these ideas to Germany. The German government, led by Chancellor Angela Merkel, has opposed moves to draw the eurozone countries even closer together. Instead, Berlin has always pushed for economic reforms and spending discipline by governments across the currency bloc. CNN

France – Merkel-Macron axis to prove pivotal for global investors

Chancellor Angela Merkel’s recent lament from a Bavarian beer tent that “we Europeans must really take our destiny into our own hands” could ultimately be as market moving as Mario Draghi’s famous “whatever it takes” pledge in the summer of 2012. Merkel’s message was pro-European, a plea for faster European integration, underpinned by none other than Germany. And now, Merkel has a pro-European ally in Emmanuel Macron whose pledge to reform the French economy and zeal for greater European integration aligns with Merkel’s vision. The upshot: a reinvigorated German-Franco axis that could spawn more political cohesion and economic integration, including a eurozone budget, eurozone bonds and greater regulatory standardisation across many fragmented markets.

All this is loaded with market implications. By asset class, there is more upside to the euro and Swiss franc, while downside for the US dollar and British pound. A more vibrant Europe will sustain the global shift towards European equities. European defence firms will benefit from rising EU defence spending. The greater the movement towards capital deepening in the eurozone, the better the prospects for Europe’s under-owned banks and sovereign debt. Meanwhile, accelerating eurozone real growth and a weaker US dollar versus the euro portends upside earnings surprises for US multinationals with strong European exposure. Another wild card: given hardening transatlantic attitudes, US technology firms could also find themselves in the crosshairs of tougher EU data privacy and sharing agreements. A more united Germany and France bodes ill for the UK and the prospects of an amicable divorce.& nbsp; FT

France – Election win puts Emmanuel Macron on course to redefine European politics

Europe’s explosive political landscape took another dramatic turn Sunday as France’s newly elected president, Emmanuel Macron, emerged as the continent’s newest political superstar.  No party before Macron’s La R�publique en marche has come from nowhere to wrest majority control of the country’s National Assembly. If these results hold up in next Sunday’s second round of voting, Macron’s overwhelming victory will shake the foundations of European and global politics.

Macron needs that, if he is to have any hope of enacting the many radical changes needed to address France’s high unemployment and ailing economy. He is also passionately pro-European, arguing that globalization can bring economic benefits to France. There is now talk of an emerging Franco-German partnership that would bring Macron and France much closer to Germany’s Chancellor Angela Merkel perhaps with some involvement from Canada’s Justin Trudeau.

With the U.S. now viewed in western Europe as untrustworthy, and British politics in disarray, this new partnership would challenge the traditional Anglo-American alliance and its conceited notions of U.S. and British “exceptionalism.” The assumption that global leadership in the defence of liberal values must always be exerted in English is no longer universally accepted on the continent of Europe. TheStar

France – French energy transition on track as Macron cements power base in parliament

Macron in his election manifesto pledged to close the remaining French coal-fired power plants before the end of his term in 2022. Gas could receive a competitive boost from a Macron-inspired carbon price floor — not only spelling the end for France’s remaining coal units, but also potentially shift production abroad with Spanish and Italian gas-fired power plants still under-utilized and priced-out of the market by ‘cheap exports’ from France. French power exports have reached new records this spring following the return of French reactors from regulator-requested inspections, which saw France turn into a net importer in January amid an extended cold spell, highlighting the security of supply issues during the winter season.

Since the Macron’s presidential election, EDF commented positively on his plans to introduce a carbon floor price and invest in renewables which is already in line with EDF’s strategy which also calls for a carbon floor price. EDF, which is 83%-owned by the French state and operates France’s 58 nuclear reactors, also confirmed the roadmap for the start-up of its 1.6 GW Flamanville-3 EPR by end-2018/early 2019 at which stage it will close its oldest currently operating nuclear plant at Fessenheim on the border with Germany.  Platts

 

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