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22nd September 2017


This week we’ve been preparing ourselves for another election, this time in Germany. At the moment Chancellor Merkel looks a strong favourite for re-election, so we should escape any major political shock. Still, Germany’s governmental system relies on parties forming coalitions, and the makeup of the next one, even after a Merkel victory is unknown. The final composition will have as much impact on Germany, Europe and ultimately Brexit, as the identity of the victor on Sunday. Elsewhere there was yet another natural disaster, with a second powerful earthquake hitting Mexico. This was coupled with a completely man-made disaster in the President of the United States, who has again decided to double down on his threats to North Korea. While the North Koreans are undoubtedly a threat to world peace, calling them out at the United Nations and effectively daring them to bomb someone is unlikely to be the best way to defuse the situation.


Wednesday evening marked a watershed “beginning of the end moment” when Janet Yellen of the Federal Reserve gave markets the clearest indication yet that they would finally begin reeling back on quantitative easing as soon as next month. For months policy makers deliberated on the removal of this unprecedented supportive monetary policy especially since a steady stream of mixed economic data (lack of inflation), natural disasters and fears of a policy mistake appeared to have tied their hands. Yellen announced they would begin phasing out reinvestments on the 31st October. Only amounts exceeding the cap of $6bn per month for treasuries and $4bn for mortgage backed securities will be reinvested. Following that announcement, the US dollar rallied and US 10 year Treasuries fell even whilst its yield was up 3 basis points. The Federal Reserve left rates unchanged whilst Federal fund futures moved to 66 per cent probability of a rate rise in December, up from 46 per cent from a weak ago. The S&P 500 briefly dipped below 2,500 but quickly recovered as US stocks took the news in their stride.


The recent surge in industrial metals particularly steel and copper prices does not come close to masking the struggles this sector has been facing. So, it doesn’t surprise that on Wednesday we learnt of the merger between India’s Tata Steel and Germany’s Thyssenkrupp as consolidation can prove to be an effective self-preservation strategy. Synergies through cost cutting in operations, sharing intellectual property and shoring up market share are basic management principles. Tata Steel’s share price would move up 47 basis points (bps) by close of trading on the day whilst Thyssenkrupp’s dropped by 109 bps. You might have missed it but this week America’s household toy institution Toys R Us filed for bankruptcy as another example of the how disruptive business models such as Amazon’s continues to reverberate across different retailing sectors. Toys R Us was no longer listed but under the control of a private equity consortium of KKR, Bain Capital and Vornado but with sales down to $11bn from $13.7bn in 2008 and profits halved since 2009, debt repayments become a burden too large.

Come Sunday the German electorate will have picked a leader and with opinion polls pointing to a CDU/CSU partnership of about 37 per cent, you would be hard pressed to rubbish these reports on the back of a growing and strong economy, unemployment at 4% and budget surpluses leaving dissidents clutching at straws. The composition of the coalition expected to be led by Angela Merkel’s is what will probably bring up the biggest surprise. If Merkel gets in for a fourth term, she has ruled out pacts with the Alternative for Germany (AfD) or the post-communist leftist Die Linke and is expected to cosy up with liberals Freed Democrats, the Greens or both. Perhaps as a slight to Merkel’s immigration stance, the AfD is expected to become the third largest party in the Bundestag, as they continue to win great support in the former East Germany. AfD’s polling of 10% is still negligible if you consider the populist right-wing politicians in France, Holland, Poland or Hungary. The German bund has been flat this week whilst the German DAX moved up 32 basis points. 

Data sourced from FE Analytics. All content is intended as general information only and does not constitute investment advice, a recommendation or investment research as defined in the FCA Handbook. This information is not guaranteed to be correct, complete or accurate. FE research is a division of Financial Express Ltd, an appointed representative of Trustnet Ltd (FRN 209967) which is authorised by the Financial Conduct Authority.

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