Market Rundown: Merkel-y waters & a Snapanese election

Good afternoon,

Merkel-y waters

The German election result and news of a snap election next month in Japan has prompted a mixed reaction in markets. Germany’s benchmark stock index, the DAX was higher but gave back some opening gains. The euro turned lower following weaker German business confidence data. Angela Merkel’s victory was so predictable that the strong performance of populists AfD drew all the attention.

Equities: Insurers lead FTSE lower

A downturn in bank and insurance company shares meant a difficult start to the week for the FTSE 100. The Bank of England is sounding the alarm on rising consumer debt levels. Any restriction on lending, particularly unsecured lending like credit cards and car loans would be a direct hit to a big profit centre for banks and insurers.

Unilever shares were little changed after it announced it is buying a majority stake in South Korea’s Carver Korea from Bain Capital and Goldman Sachs. Shareholders should appreciate Unilever’s opportunistic foray into South Korea when geopolitics has offered a discount. The hesitancy could stem from a likely negative impact of the acquisition on short-term shareholder returns.

The German DAX was narrowly higher midway through the day after the German election. The worst result for Merkel’s CDU/CSU alliance since WW2 tells you populism is alive and well in Germany. Merkel has indicated she will keep her immigration policy intact so the next election in four years’ time could be a much closer affair. A likely ‘Jamaica’ coalition with the Greens and Liberals saw shares of utility firm RWE fall 3%. If The Green’s get their way, it could spell the end of coal-fired power plants in Germany.

Forex: Snapanese election

The Japanese yen jumped after Japanese Prime Minister Abe announced he will dissolve parliament on Thursday (Sept, 28) for a snap election. USDJPY fell 50 pips back through 112 on the news. The positive initial market reaction seems to be a twofold reaction to increased certainty now that a date for the election is known and Abe’s proposed 2tn yen stimulus package. We would expect the longer term reaction to be different. Abe’s re-election should extend the life of the BOJ’s asset purchase programme and weaken the yen and boost the Nikkei.

Disappointing German IFO data added some economic weight to weakness in the euro after Angela’ Merkel’s unconvincing election victory.  The German IFO survey fell from a reading of 115.9 for October to 115.2 in September. Mario Draghi is talking to European parliament at 15.00 BST. Any tapering talk might be enough to put the floor under any election-induced euro weakness.

The pound was catching a bid in a sign last week’s correction could be over. That’s despite higher than usual UK political risk this week from the party conferences. Of some note, Shadow Chancellor John McDonnell has said Labour would nationalise construction. Jeremey Corbyn will address the Labour party conference on Wednesday while Theresa May is set to apologise for the election at the Tory conference on Saturday.

Commodities: OPEC compliance boosts oil

The uptrend in oil prices it taking another leg higher after the OPEC meeting on Friday reported high compliance with output cuts and implied an extension of the cuts beyond March. Oil ministers were patting themselves on the back in Vienna, and perhaps rightly so. High compliance with its production cuts mean OPEC has played its part in reducing the global supply glut. The more favourable supply-demand dynamic could see Brent crude reach $60 per barrel and two-year highs this year.

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