Merkel Easily Regains German Chancellorship

If you want a way of winning a modern election there are few examples better than the one shown in Germany over the weekend. Angela Merkel and her CDU party romped to the largest victory in an election since Helmut Kohl’s reunification vote, and only just missed out on an overall majority in the Bundestag – 5 seats being the difference. The task of coalition building in Germany must now start, and with the FDP party missing out on making the 5% mark necessary to gain seats in the Parliament, it looks like a grand coalition of the CDU party and the SDP will form over the coming days.

Euro has strengthened a bit on the news this morning with GBPEUR back towards the 1.18 level. Given the lack of real change in German policy towards the Eurozone – and in particular the periphery – as a result of the election win, we suspect that the euro should resume its path of weakness against the USD and GBP. This weakness will be increased if the building process takes as long as the previous coalition between these two parties – 65 days.

Away from political issues for a moment we have French, German and Eurozone wide data this morning that should show that the recovery in the Eurozone is still coming along, albeit at a very slow rate. PMIs for both the manufacturing and services industries are all expected to grow at a rate of around 51.0 although the services sector in France is still expected to contract.

Overnight the Chinese manufacturing sector was shown to have risen to a 6 month high, showing further signs that the encouraging news from the world’s 2nd largest economies will continue through the rest of the year. This has contributed to the slight feeling of general ‘risk on’ this morning with AUD benefiting as it always does when there’s good news from Beijing.

Of course, despite the Fed’s reticence to reduce the level of asset purchases it is firing into the US economy on a monthly basis, we must now be vigilant as to when we will see it. St Louis Fed President James Bullard told reporters on Friday that an October taper is still possible. To us this makes little sense; there is very little chance that the Fed would see just one additional months’ worth of data as enough to sway the minds of the FOMC and the market reaction – particular the lowering of bond yields – may need more time. The USD hasn’t moved too much overnight but looks a little unloved as we open up in Europe.