Week Ahead: Will German Elections Set Pulses Racing?

Week Ahead: Will German Elections Set Pulses Racing?

Written by: Phil Evans

Germany’s federal elections look set to return Angela Merkel to power, but are markets overly complacent?

German Elections

As far elections go, Germany’s upcoming federal poll is hardly the most exciting. But after the shock of Brexit and Donald Trump, boredom may be a welcome relief for investors.
Angela Merkel is odds-on to return to power and continue her reign as chancellor, a position she has held since 2005. Victory would easily make her the longest-serving western leader and cements her position as Europe’s pre-eminent politician.

Her Christian Democratic Union and Bavarian sister party the Christian Social Union are expected to gain a third of the popular vote, comfortably enough to make it the leading bloc in any ruling coalition. The question is who will form the junior partner or partners.

As by far and away the biggest power in the EU, the elections have vital ramifications for everything from the ECB to Brexit. Continuity of leadership, all but guaranteed, should keep markets happy. A shock, if it were to come, would be gigantic.

What could it mean for the markets? Given the likelihood of a Merkel win, any moves on the results are anticipated to be mild. However, there may yet be the potential for a small relief rally in the DAX on Monday morning should results be seen as maintaining the status quo. Anything that is perceived to weaken Mrs Merkel could be negative for European equity markets.

Euro volatility has risen a touch leading up to the vote, but at under 10, it’s well short of the c19 level reached ahead of the riskier French elections.

US PCE Inflation

The Federal Reserve’s preferred measure of US inflation is due on Friday. As ever it will be closely watched as a gauge of where the Federal Reserve is likely to take monetary policy. Coming hot off the heels of last Wednesday’s FOMC decision, it be an important yardstick for interest rate expectations going into the year-end.

Price growth so far this year has been muted and is decelerating. A further fall, particularly in the core index which excludes food and energy prices, would once again cast doubt on the Fed’s commitment to hiking rates again this year.

Eurozone Flash Inflation

Friday is inflation day with the flash estimate for price growth in the Eurozone due ahead of the US PCE numbers. Once again these early indicators for inflation in September will be assessed for any likely impact on the European Central Bank’s policy making.

With the ECB widely expected to announce tapering at its October meeting, markets are particularly sensitive to anything that could derail the expected path. Euro area annual inflation was 1.5% in August 2017, up from 1.3% in July 2017, although core inflation, the most important for the ECB’s decision making, has remained at a fairly lacklustre 1.2% for the last two months.

Could weaker inflation derail the ECB? Mario Draghi teed up markets to expect tapering announcements in October but doubts have since surfaced about whether it’s fully ready to reveal its intentions. If inflation slides back at all markets may begin to fret over the ECB’s commitment to the taper.

 

Source: ETX Capital

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