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German Election Ends In Gridlock

By CMC Markets (Michael Hewson)Market OverviewSep 27, 2021 06:57
uk.investing.com/analysis/german-election-ends-in-gridlock-200497701
German Election Ends In Gridlock
By CMC Markets (Michael Hewson)   |  Sep 27, 2021 06:57
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Despite hitting two-month lows last week, markets in Europe eventually managed to finish higher, on the week, reversing a run of three successive weekly losses.

Concerns about contagion effects from Evergrande (HK:3333) haven’t gone away, but they appear to have taken a back seat to worries about supply chain blockages, surging energy prices and rising inflationary pressure. This also helps to explain the sharp rise in bond yields which we saw last week, although hawkish turns from the Federal Reserve and Bank of England also played a part, particularly given the underlying price pressures appear to be showing little signs of diminishing.

In an outcome that will surprise no-one the German elections at the weekend provided the deadlocked outcome that was predicted. The SPD is still going to be the largest party, however they don’t appear to have done as well as expected, while the CDU/CSU appear to have performed much better, although it’s still their worst post war result ever.

This means that the likely outcome will be a three-way party coalition, with the SPD set to lead the way, alongside the Green’s and one other party, most likely the FDP, though Linke might also scrape into the equation, though at this stage this looks unlikely.

Of course, there could be another Grand Coalition but that doesn’t seem likely given how much damage the last one did to the SPD brand, sending its polling numbers down to as low as 15% as recently as the end of last year. The Greens will be the most disappointed given they were polling at 25% as recently as May, a remarkable fall from grace.

Using the 2017 election as a benchmark it would be unexpected if we did get a new government before Christmas, given the last one took until February 2018 to come into any kind of focus, which means that Angela Merkel may have to stay in place for a while longer yet until her successor is appointed.

What this means for German politics is that nothing much is likely to change in the short term, with investor attention likely to remain on events in China, and Asia more broadly, as well as the various supply crunches taking place across the world.

We also need to be cognisant of the fact that we are coming up to the end of the month, as well as the end of the quarter, which could temper, or exacerbate market volatility. Asia markets have had a somewhat mixed session, with the Nikkei giving up some decent early gains, with markets here in Europe looking set to open higher.

We also have the latest US PCE inflation numbers, as well as the latest flash EU CPI, at a time when yields appear to have broken out to the upside, which could signal further upside risk, for both short-term, as well as long term yields.

On the data front we have the latest US Durable Goods numbers for August, which are expected to see a rise of 0.6%. Excluding transportation this is expected to come in slightly lower at 0.5%.

EURUSD – rebounded from the 1.1680 level last week, with the prospect we may have seen a short-term base. A break above 1.1760 opens up a return to the 1.1840 area. A break below 1.1650 opens up the prospect of a move to the 1.1600/10 level.

GBPUSD – strong reversal off the 1.3600 area last week, rebounding to the 1.3750 level. We now need to see a move above 1.3775 to reopen a path towards the 1.3900 area. A move below 1.3600 risks 1.3400.

EURGBP – fell back from the 0.8610 area again last week, finding support at the 0.8535 area. The bias remains towards the bottom end of the recent range. Also have support at the lows this month at 0.8500/10.

USDJPY – moved up to the 110.80 area last week, with the potential to move towards the previous highs at 111.60. Support now comes in at the 110.20 area, as well as back at the 109.20 area.

"DISCLAIMER: CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed.

No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. "

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German Election Ends In Gridlock
 

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German Election Ends In Gridlock

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