Germany and China in the spotlight

The German elections have produced an even closer result than expected. The outcome of the forthcoming negotiations to form a government coalition looks very uncertain. The SPD won by a narrow margin ahead of the CDU-CSU. The Greens and the FPD Liberals are following at a distance (see provisional results here). Of the possible scenarios considered before the elections, two seem to emerge: a tripartite alliance with the Greens and the FDP, either led by the SPD or by the CDU-CSU. The first scenario would seem more logical since the SPD has won the most votes and all three parties are up on 2017, while the conservatives are falling heavily. But it will be very difficult to integrate the FDP in this coalition, as it would be difficult to see the Greens working with the CDU-CSU and the FDP. At best, Germany will have a new government just before Christmas.

The German elections are not expected to have a strong immediate impact on the markets. They are looking to China, where the Evergrande issue (the outcome of which is still uncertain) is already being superseded by growing fears of a sharp economic slowdown: after the difficulties in curbing the pandemic and the slowdown in the property market, it is the power cuts, whether they are the result of soaring fuel costs or the strict targets set by the authorities to reduce pollution, that are disrupting industrial activity and even starting to have an impact on households. Thursday’s PMIs release will be closely watched to fine-tune growth forecasts.

This week is rich in statistics (inflation in the euro zone, durable goods orders, household confidence, consumption, ISM in the US) and crucial for the Biden administration with key budgetary votes in Congress.

Bond yields seem to be levelling off a little (1.45% for the US 10 year) and the dollar is strengthening slightly, close to 1.17 against the euro.