Donald Trump is a highly polarising force in US politics. That is clear. In fact, it is so clear it hardly requires stating. There is a great deal of discontent with his policies – importantly this encompasses his chief strategist Steve Bannon who, having just been given a permanent seat on the National Security Council, is clearly a major, if not the major, driving force behind Trump’s presidency. Moreover, this discontent is felt as keenly abroad as it is domestically.
To get some sense of scale of this polarity of opinion take a look at the US country Emotional Polar Map which plots the relative strength of the eight primary emotions extracted from millions of finance articles published around the globe every day – see below:
Anticipation has the highest reading – consistent with continuing hope that Trump will deliver on his “Make America Great Again” campaign slogan. However, anger, disgust and fear are also extremely elevated, indicative of considerable negativity.
Increased political discord is, however, patently not just a US phenomenon. It goes much broader and runs much deeper. One way to quantifiably demonstrate the magnitude of this discord is by using crowd-sourced sentiments to track public anger towards governments. As the below chart shows, this sentiment indicator has risen markedly in many countries over the past several months. Indeed, contrasting the latest global heatmap with that of a year ago is extremely telling; clearly the phrase “red-shift” is no longer just pertinent to physicists (or Amazon customers).
Chart 2 – Global Heat Map: Crowd-sourced Government Anger
A year ago
The Trump administration is still very embryonic and given his obvious desire to shake things up, US politics will continue to be very much at the forefront of investors’ minds. Nevertheless, Europe is increasingly providing its own political distractions, something that has not gone unnoticed by the region’s government bond markets. Heightened uncertainty as to the outcome of key upcoming elections in Germany, France and the Netherlands (it appears increasingly likely that Italy will be added to that list before too long) was a significant reason behind the underperformance of European debt markets over recent weeks.
With the Dutch election now just over a month away (March 15) and with the polls showing the far-right party PVV – headed by Geert Wilders, a man with a head of hair that puts even Donald to shame – the election is being viewed as critical test as to whether the populist revolt seen in the Anglosphere will be replicated in continental Europe. This is especially so given that just like the US, the public mood in the Netherlands is very negatively skewed: disgust and fear are the two highest ranking emotions – see chart below.
Having failed to predict the two biggest political events of last year, it is hardly surprisingly that investors are jumping at every shadow, especially given the dramatic market impact these events had. Nevertheless, it is hard to see much merit in overcompensating for last year’s failings by overestimating the odds that European governments will soon be led by populist politicians with radically different policy agendas.
Although, as just mentioned, Wilders’ party is ahead in the opinion polls, this is not as commanding a position as it may appear. The Dutch political landscape is very fragmented such that six of the 28 (no typo) parties contesting the election have vote shares in double digits and all of the other main parties have stated that they do not intend to go into a coalition with PVV. Hence, there is a very strong likelihood that even if Wilders’ party comes out top in the vote, it will not be part of the inevitable coalition government.
Obviously, with this in mind, Wilders is hoping to tap into voter discontent with the status quo during the last few weeks of the campaign with the aim of increasing his vote share to give his party (and him) an unassailable bargaining position.
Unfortunately for Wilders this negative public mindset is not strongly directed towards the current political leaders. Unlike other countries where public anger towards the government is very high, in the Netherlands it has fallen over the past several weeks and now stands roughly at the long-run average.
In short, there does not appear to be a large enough reservoir of public negativity towards the current government for Wilders to exploit in the coming weeks such that he will succeed in his ambition to lead the next Dutch government.
That said, this may not be immediately apparent as Dutch coalition governments can take time to be formed. Indeed, it is quite possible, depending upon how the vote splits, that the eventual composition of the coalition may not even be known by the time of the first round of the French Presidential election scheduled to take place on April 23.
Regards the French election, there is certainly a great deal of commonality between Wilders and Front National leader Marine Le Pen. Both are ardent nationalists, both wish to leave the single currency and both want to limit immigration. Similarly, Le Pen is currently in pole position in the opinion polls for the first round, and the public mindset is also very negative in France – see chart below:
However, there is one final similarity between the two European politicians that investors need to bear in mind.
Le Pen’s path to becoming the next inhabitant of Hôtel Matignon has been made somewhat easier by one of the other leading contenders Fillon, the centre-right candidate, having become embroiled in the Penelope-Gate expense scandal. Yet, the opinion polls show Le Pen still has an incredibly low probability of winning the second round either against Fillon – assuming he stays in the race and survives the first round – or, more likely, the Socialist contender, Macron. Hence, if she wishes to become France’s next political leader, just like Wilders, she too must tap into voter discontent with the status quo in what remains of the campaign.
Despite President Hollande’s personal approval ratings having slumped to record lows – the reason why he ruled himself out of the race – our crowd-sourced sentiment indicator shows dissipating public anger towards the government in France just as it does in the Netherlands. Hence, despite all the media headlines that have fuelled investor anxiety, the momentum of crowd sentiment does not appear to favour Le Pen becoming the next French leader, even though it is highly likely she makes it to the second round.
The German Take
So, finally, what about Germany? Well, here it gets rather interesting. Looking back at the global heatmaps shown in the first chart, one will observe that Germany is the only country coloured red on both, indicative of extremely high, and entrenched, anger towards the government. Moreover, unlike the Netherlands and France, this negative sentiment has not only remained high but has increased over the past several weeks.
This is extremely bad news for Angela Merkel, who is seeking a fourth term as German chancellor in the September’s election. Convincing an electorate to back you is always a challenge, especially for one who has been in power for so long. But doing so when their psychology is so consistently negative towards your administration looks to be an insurmountable barrier.
Certainly, it looks to be much more difficult a task than the opinion polls suggest. Most have Merkel’s CDU-CSU coalition in front of the main challenger, the SPD, headed by former EU Parliament President (and hence decidedly not a “populist”) but relative newcomer to German domestic politics, Martin Schulz.
Ostensibly, the public’s negativity towards Merkel’s government stems from her open-door immigration policy that resulted in a large influx of refugees in 2015 and 2016 (albeit the pace of inflows slowed dramatically last year). However, perhaps there is more to it than this. If immigration was the primary reason for public anger towards her government one would naturally expect the right wing anti-immigration AfD party to be gaining ground.
Although AfD gained in the polls last year and now consistently poll in the low double-digits, it is the centre-left SPD that has experienced the most recent surge in support in the polls. This suggests their decision to bring in a relative outsider to benefit from the negative social mood towards incumbent German politicians is paying off handsomely.
As always, one needs to add the caveat that the political situation in Europe remains very fluid and things (including crowd sentiment) can, and indeed will, change. But as things stand at present, worries about the “populist” movement spreading to continental Europe seem rather far-fetched.
For investors, this suggests that the best approach to the region’s government bond markets is to view any widening in intra-regional spreads triggered by political jitters that will inevitably occur during the various election campaigns as opportunities to enhance yield rather than be tempted to play the end-of-the-single-currency game.