Mark Fowler: Politics driving market direction

Emmanuel Macron's victory calmed fears of a French exit from the European Union. Photo / AP

Opinion

In the wake of recent events playing out across Europe and the US, analysts and market commentators are seeing increased evidence of a market obsession with geopolitical risks - particularly as drivers of economic fundamentals, and investor sentiment.

Late last month, British Prime Minister Theresa May received parliamentary approval to schedule an early general election, to take place in June. It will be the UK's second in as many years.

The markets welcomed the news by bidding up Sterling. The rationale was that a larger majority for the sitting PM would provide her with additional flexibility - not so much against the opposition, but her own backbench MPs.

This, in turn, could make a "soft Brexit" more likely.

It could also make it easier to impose higher taxes, or more stringent spending cuts - and the biggest parliamentary rebellion May has suffered since taking the top job last year was in response to her movement to raise taxes on the self-employed.

Look across the channel and we're seeing further evidence of politics playing a key role in the direction of global markets, with the French and German presidential election results shaping up as pivotal events for the European community in 2017.

Last week, markets took comfort in the victory of French President Emmanuel Macron, the reformist centre-left candidate of En Marche, who took home around 66 per cent of the vote to secure his win against far right candidate, Marine Le Pen.

The focus has now shifted to the pending French parliamentary elections.

The French 10-year Treasury bond yield had risen to 0.898 per cent, as short-term fears of a "Frexit"-based bond sell-off were alleviated, only to retrace to 0.82 per cent this week on the back of weaker US sentiment affecting global markets.

In the US, with the euphoria of the November elections behind them, the focus has now switched to Trump's tax package, in light of failed attempts to repeal Obamacare.

At the outset it sounds impressive, but there are significant questions regarding how it will be paid for if successful.

The proposal includes: cutting the corporate rate to 15 per cent, a one-time levy on the US$2.6 trillion ($3.8t) US companies have earned overseas, eliminating the estate and alternative minimum taxes, and lowering the top individual tax bracket to 35 per cent from 39.6 per cent.

In addition, there are reports that Trump is "seriously considering" signing a document that would signal an intent to withdraw from the North American Free Trade Agreement this year - which would strike another heavy blow to trade agreements, with the hangover of this attributable to some of the recent commodity block weakness.

The NZD in particular has worn the brunt of this US protectionist policy narrative, with the NZD/USD cross-trading at 0.6840 last week, representing a six-month low - all despite a bounce higher in soft commodity prices over the same period, which traditionally has had a close correlation with the NZ dollar.

While the full after-effects of these political movements are yet to be revealed, what is certain is that global markets are increasingly wary of the changing global political landscape, as we begin to see a shift from a world predominantly led from a central bank bias, to leadership of the day.

• Mark Fowler is Head of Fixed Income at Hobson Wealth Partners. This article does not consider the objectives or situation of any particular investor. It should not be construed as a solicitation to buy or sell any security or product.