European economy in recovery mode, but China retreat drags down miners

This weekend, the markets will find out whether or not they were right not to take Marine Le Pen too seriously

The French election race is heading towards the finishing post

On the whole, Marine Le Pen’s bid to become President of France has passed comparatively unremarked. The world has noticed, yes. President Trump has made noises in favour - in spite, or perhaps because of her pro-Russian leanings. But there have been none of the riots, protests and international indignation that accompanied the candidacy of her father in 2002.

That’s partly because right wing-populists are de-rigeur in elections nowadays – in particular they have featured in the USA, in Britain, in Hungary, in France, in Greece, in Holland, in Austria, in Russia, in Turkey and in Poland.

But it’s also because PMI numbers are coming in good again, right across Europe.

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Counterintuitively, the numbers are particularly strong in Britain, a country much congratulated by Le Pen for voting Brexit.

Here, purchasing managers surveyed across services, construction and manufacturing all reported strong levels of economic activity.

The UK manufacturing index in particular was strong in April, hitting a three-year high of 57.3, while at 55.8 the all-powerful services industry also looks in good shape.

But before the Brexiteers get too cock-a-hoop about what all this proves, let’s hop back across the Channel, where composite PMI numbers in the Eurozone hit a 56.8 six-year high in April.

“Activity has expanded for 46 months in a row,” according to commentary from UK-based Markit, which compiles the data. “Output growth accelerated at manufacturers and service providers, with rates of increase hitting 72- month records in both cases.”

What’s more, PMI numbers for problem-child Spain hit 20 month highs, while in the Eurozone as a whole Markit noted the narrowest ever spread between economic activity in different member zones.

It’s hardly surprising therefore, that both the DAX and the CAC are hitting new highs.

The spectre of Frexit

To be sure, there is the spectre of Frexit with the candidacy of Marine Le Pen for French President stronger than anyone could have predicted even a short five years ago, but markets are pricing in a victory for her more moderate opponent Mr Macron.

Markets have been wrong before, of course, and so have purchasing managers.

But that brings us back to the PMI numbers - at the moment, the European pillar of the global economy looks to be on fairly secure ground. Brexit will cause wobbles. But if both the UK and continental Europe can continue to turn in good economic growth and falling unemployment, then it may be that the worst of the economic storms of the last few years are now over.

And, what if, contrary to all the rhetoric that’s currently flying around, the Brexit negotiations actually go well?

Either way, in terms of global politics the UK is likely to be relegated to the third rank.

But be that as it may, for economic free-marketeers and protectionists alike if the upshot of the recent upheavals is the continued advance of post-war European prosperity then all will be pleased.

Indeed, all sides will probably claim to have won the argument.

And yet, there are still risks. A victory for Marine Le Pen would throw a hand grenade into that rosy outlook, as would Mr Trump starting a war in the Middle East or the Korean peninsula.

A Marine Le Pen victory would also likely send the price of gold back above the US$1,250 mark, through which it fell this week.

The weakness came primarily on the likelihood of a further Fed rate rise in June, a slight scaling back of US war rhetoric, that prospect of a centrist victory in the French election, and a general weakening in sentiment towards commodities.

As a consequence, the biggest faller in the week on the currency markets was the Aussie dollar, dragged lower on a tumbling iron ore price, which is itself falling because of oversupply and, to bring us full circle, in response to the latest PMI numbers from China, which are less bullish than the European ones.

FTSE miners were also weaker, taking some of the shine off an otherwise up week for the index as a whole.

But if the combined squeeze of a weaker China and a stronger dollar now looks set to wipe out all the positive sentiment that was fizzing around commodities at the start of the year, there is still a modicum of hope.

After all, as Trump and Brexit have shown us only too clearly, polling isn’t what it was. A Le Pen victory would put gold up, but might not have much of an immediate impact on the wider commodities complex.

But the purchasing managers’ index too is just a form of polling by another name. And purchasing managers have been wrong before. How strong China really is remains the intriguing question of our century.

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