Good morning,
EUR: Euro slips as German far right take Bundestag seats
While Angela Merkel’s CDU/CSU party won the German general election and will now begin the process of building a coalition to govern, the focus of the newsflow out of Germany is the gains made by the Alternative fur Deutschland party, giving them their first seats in the Bundestag since their formation around 5 years ago.
The campaign politics of immigration and opposition to Islam are nothing new but the AfD now command a little over 13% of the German parliament in the best showing of a far-right party since the Second World War. The news that the party had won seats was initially greeted by falls for the single currency that have since been reversed.
Coalition building is now the key and we anticipate a so-called ‘Jamaica coalition’ of the CDU/CSU with the FDP and the Greens to come together following the SDP party’s refusal to take on a grand coalition with Frau Merkel. These talks could take as long as 3 months although we doubt the length will have much impact on the single currency.
Today’s German IFO survey of business sentiment will keep the focus on Europe’s largest economy.
GBP: Florence falls for sterling
Sterling came lower on Friday afternoon as Theresa May attempted to reboot Brexit in a Tuscan church. Hard Brexiteers saw her admission that a transitional arrangement would be needed as a betrayal while Remainers sat back and asked what was new within her speech. Brexit remains an unclear proposition at its base levels; the ‘sufficient’ progress that Michel Barnier was looking for by October in order to begin talking about trade is still distinctly absent.
Later in the day the credit rating agency Moody’s downgraded the UK’s credit rating by a notch to Aa2 from Aa1 – its lowest level on record. The basis of the downgrade was on the belief that Brexit worsened the outlook for public finances and growth. Sovereign ratings matter less than they used to – some would say that they never really mattered at all – and we cannot foresee a shift in UK debt costs as a result of this change. Most within markets view this change as Moody’s catching up to the consensus more than anything new.
USD: NFL and tax changes
Donald Trump spent a lot of yesterday castigating American football players for kneeling during the national anthem prior to their games beginning while his political engine is gearing up for a fight on tax. A Republican tax plan is set to be released this week detailing a cut in tax paid by businesses to 20% although the hit to the US’s budget looks extreme given the failure of Congress to repeal Obamacare as the Trump administration would have wanted.
We have 13 separate speeches by Fed members this week with this being the first chance for most to outline their thoughts following the Federal Reserve’s decision to begin its balance sheet reduction plan next month.
The Day Ahead
Politics will be front and centre in Berlin as well as in New Zealand following the election there over the weekend and the expectation that Japanese PM Abe will call an early election at a press conference this morning.
Have a great day
Jeremy Cook, Chief Economist