If you are British, this week will be dominated by politics. But anywhere else in the world there are other things happening that are vastly more important. Here are my top five.
First, what will happen to the share prices of high-tech America? Last Friday saw tech stocks take a huge hit: Facebook, Apple, Amazon, Alphabet (Google’s parent company) and Microsoft were all down more than 3 per cent. That is just one day and maybe the market will wake up, shrug and plough on upwards. But somewhere out in the future, investors will reckon that it is time to take some of their huge profits on high-tech shares, and the rest of the world is in danger of being trampled in the rush to the door.
To say that is not to play down the worth of these companies in economic or indeed social terms. They are changing the world, not just America. The issue is the price you put on that. Last week Tesla passed BMW in market capitalisation. BMW is hugely competent, made more than two million cars last year, and is profitable. Tesla is loss-making, produced only 80,000 cars last year, and faces huge risks in ramping up production now with the new smaller Tesla 3. Thus investors are putting a massive value on hope. Those giants noted above are established and profitable, but even with them there is an element of hope, in the sense that you can only justify their present valuations if there are to be several more years of solid growth. Goldman Sachs reported on these companies last week, comparing the situation now with the tech bubble that peaked at the beginning of 2000. In some ways the situation is not as fragile now, but there are some parallels.
All this matters because high-tech companies have driven the rise in US share prices – in relative terms technology is much more important in the US than in the UK or Europe. If they reverse, the whole US equity market will be pulled down, and it is hard to see that not impacting the rest of the world.
The other running US financial story is the next rise in US interest rates. The Federal Reserve’s open market committee is expected to increase rates by 0.25 per cent on Wednesday. Conceivably the market meltdown at the end of last week, if it continues, might encourage them to hesitate but I doubt it. So what will the reaction be? Given market expectations, I think it would send a worse signal not to move than to move. This is very much one to watch, with as always the second day market reaction the best indicator of what will happen in the weeks ahead. (On the subject of interest rates, there is also a Bank of England monetary policy committee meeting, but no surprises there.)
Thinking about US interest rates leads to wondering whether the dollar has peaked. It is riding high at the moment but I was intrigued by a paper from the French bank Société Genéralé suggesting that the dollar is heading down. It says: “At current levels, it’s significantly overvalued, and a shift in the relative momentum of economic growth and monetary policy from the US to Europe suggests that new highs are unlikely. The way down will be uneven and frequently interrupted, but the clear winner should be the euro.”
In Europe look at France. Assuming the parliamentary elections do give him the landslide victory the polls suggest, Emmanuel Macron will have not just the levers of power but something attached at the other end – unlike, incidentally, Donald Trump, who has discovered that you pull a lever and nothing happens. So will France embark on serious structural reform? We won’t get the answer to that this week, but we will start to get a feeling for his chances. Can he succeed where successive French presidents have failed? And if so, how will that affect the Franco-German alliance in Europe? More Europe – in the sense of closer integration? Probably, but at what cost to the fringe countries?
Finally, not so much a UK story because this is determined by global investors, not British ones: will sterling start to recover a bit this week? For all the stuff around the election, with the pound off sharply, it was on Friday still more than 3 per cent up against the dollar since the beginning of the year. True, at $1.27 it is down from $1.30 in the middle of last month, and true, the foreign exchanges are fickle places. But let’s see. It feels about 20 per cent undervalued against the dollar and perhaps 10 per cent against the euro – though I expect it to remain in the doghouse for a while yet.