Opinion | Investors need to grasp the gravity of Trump and Le Pen threat
.July 4, 2024
Are financial markets starting to take political risks in the United States and Europe more seriously? Over the past week there have been indications that global investors are waking up to the renewed populist threat in advanced economies.
US President Joe Biden’s disastrous performance in the presidential debate against Donald Trump on June 27, followed by the strong lead taken by the far-right party of Marine Le Pen in the first round of France’s parliamentary election on June 30, have propelled political risk to the top of the list of investors’ concerns.
In prediction markets, where punters bet on the outcomes of particular events, Trump is a shoo-in to win the presidential election on November 5. According to RealClearPolitics, which aggregates a number of spread betting sites to produce an average probability of a candidate winning, the odds of a Biden victory have fallen from 35 per cent just before the debate to 13.7 per cent. Trump’s chances, meanwhile, currently stand at 55 per cent, up from 43 per cent two months ago.
Moreover, investment banks have begun to focus on the implications of Trump’s economic and trade policies. Morgan Stanley believes the former president’s pledge to clamp down on immigration and impose more punitive tariffs on imports would cause America’s economy to slow more sharply. This would heighten expectations of steeper cuts in interest rates even though inflation would reaccelerate.
In France, President Emmanuel Macron’s controversial decision to call a snap parliamentary election in the hope of arresting the momentum behind the far-right has backfired. The National Rally (RN), Le Pen’s party and its allies, not only won about 33 per cent of the vote in the first round, giving it a shot at winning an absolute majority in the run-off on July 7, a left-wing alliance dominated by hard-left parties came second with 28 per cent of the vote.
French stocks and bonds have come under pressure amid concerns about a post-election populist spending spree that would put France on a collision course with the European Commission. The gap between the yield on French 10-year bonds and its German equivalent – a key gauge of risk in the euro zone – has risen sharply.
Eric Ciotti (centre) of right-wing opposition party Les Republicains and Marine Le Pen (right) of the National Rally party attend a press conference ahead of legislative elections in Paris on June 24. Photo: EPA-EFE
Yet while investors are paying more attention to political risks in the US and euro zone, they have yet to recognise the gravity of the populist-nationalist threat. While trading during elections is difficult, it should be obvious that US and European politics are entering a new and much more dangerous phase with big consequences for the global economy and markets.
First, Biden’s own team is in denial about his fitness to run for re-election, let alone govern for another four years. A lot can happen in the next four months, but it is painfully clear that Biden is not up to the job. His party knows this and, more worryingly, so do American voters and the rest of the world.
The fear of civil war breaking out in the Democratic Party if Biden steps down as its presidential nominee is causing a paralysing political crisis, one that plays into Trump’s hands, making him more electable and more dangerous. When many Americans have lost faith in democracy, Biden’s apparent determination to pursue his re-election bid at all costs is a red rag to an anti-establishment bull. He should quickly give way to another candidate.
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US presidential debate: Biden and Trump spar over economy, war in Ukraine
US presidential debate: Biden and Trump spar over economy, war in Ukraine
Second, while markets tend to play down political risk, the politicisation of US institutions, in particular the Federal Reserve, is much more sensitive. The landmark decision by the Supreme Court on July 1 to grant Trump a large degree of immunity from criminal prosecution over his efforts to overturn the 2020 presidential election results shows how dangerously partisan the court has become.
It is no secret that Trump, who put three of the court’s justices on the bench to create a 6-3 conservative majority, wants to replace Jerome Powell as Fed chair. His advisers are debating a proposal that would require the Fed to submit its interest rate decisions to the White House in advance. The Fed’s independence hangs in the balance.
Third, investors are trivialising the economic consequences of a second Trump term. Restrictive immigration policies, 10 per cent tariffs on all imports and a 60 per cent levy on goods from China would be highly damaging to US and global growth, eliciting stronger countermeasures from Beijing.
In a report last month, Moody’s Analytics predicted that, in the event of a Trump victory and a Republican-controlled Congress, the US would risk tipping into recession next year or in 2026 while core inflation would remain above 3 per cent. Even this may be understating the damage.
A cashier assists a customer at a hardware store in San Francisco, California, on June 7. Inflation will be a concern if Trump wins the presidential election and Republicans come to control Congress Photo: Bloomberg
Fourth, although Le Pen’s party is unlikely to win an absolute majority in Sunday’s run-off, centrist politics in the European Union’s second-largest economy has been crushed.
Much of Le Pen’s social and economic programme, especially her migration policy, contravenes EU law. While she has shelved her most radical plan – a “Frexit” – her policies are deeply nationalist and protectionist.
A populist and Eurosceptic France will make it much more difficult for Europe to respond to China’s competitive threat. It will also exacerbate tensions between France and Germany, exposing the vulnerabilities that contributed to the 2010-12 euro-[zone crisis.
US and European politics, while garnering more attention, are still a sideshow for markets. This is a huge misjudgment of risk, one which some investors are belatedly recognising.
