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Notes/Observations

German Chancellor Merkel faces tough coalition talks following German Election results

German Business moral drops slightly in Sep

PM Abe calls snap election, to seek ¥2T economic package

Overnight

Asia:

Election results in New Zealand saw ruling National Party with 46.6% and Labour with 35.5%. With neither party winning enough seats to have a majority in parliament.

Eight China cities, including Shijiazhuang, Chongqing, Nanchang, Nanning and Guiyang imposed curbs on home resales as part of campaign to cool home prices

(JP) PM Abe to dissolve lower house on Sept 28th (confirms will call snap election); confirms to seek ¥2.0T ($17.8B) economic package

Europe:

German Chancellor Angela Merkel re-elected for fourth term taking just shy of 33% of the vote, Her conservative CDU/CSU bloc and SPD results were lowest in almost 70 years.

Current coalition partner, the social democratic SPD, says it will go into opposition after historic losses.

Nationalist party took a notable part of the vote (13%) which will see the AFD Party enter parliament for first time

German IFO index edges downward, but remains well above its long term average

UK credit rating cut to Aa2 from Aa1 at Moody's

Americas

The US widens scope of Travel ban to include North Korea, Venezuela and Chad

Oil:

Iraqi Kurds vote in independence referendum from Iraq

Economic data

(DE) GERMANY SEPT IFO BUSINESS CLIMATE: 115.2 V 116.0E; CURRENT ASSESSMENT: 123.6 V 124.7E

Expectation Survey: 107.4 v 108e

(ES) Spain Aug PPI M/M: -0.1% v -0.1% prior; Y/Y: 3.2% v 3.0% prior

Fixed Income Issuance:

Non seen

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

Indices [Stoxx50 +0.1% at 3,546, FTSE -0.2% at 7,298, DAX +0.3% at 12,627, CAC-40 flat at 5,281, IBEX-35 -0.6% at 10,245, FTSE MIB +0.1% at 22,544, SMI +0.2% at 9,158, S&P 500 Futures -0.1%]

Market Focal Points/Key Themes: European stocks opened lower, but drifted upwards as the session progressed; peripheral markets underperforming; political uncertainty following election results over weekend weighed on sentiment; UK stocks in focus after Moody's cut country's risk rating; Alstom and Siemens disclose entered discussions to merge train units; commodities weakened, weighing on energy and materials stocks; attention turning to ECB's Draghi speech later today and Fed Chair Yellen tomorrow

Equities

Consumer discretionary: Aryzta ARYN.CH +2.2% (results), Autogrill AGL.IT -2.3% (analyst action), Norwegian Air NAS.NO +3.2% (unit awarded flight permission in US), Sodexo SW.FR -0.3% (analyst action), Unilever UNA.NL +0.1% (acquisition)

Energy: Tullow Oil TLW.UK +5.9% (expected to resume drilling)

Industrials: Alstom ALO.FR +1.1% (talks with Siemens), Fincantieri FCT.IT +4.4% (contract award)

Materials: Essentra ESNT.UK +2.6% (hurricane update)

Technology: AMS AMS.CH -4.3% (bond issue), Imagination Technologies IMG.UK +32.1%(takeover), Nets NETS.DK 6.4% (takeover offer)

Speakers

(UK) BOE Financial Policy Committee: Reiterates plan to lift capital buffer in November - Statement

German IFO economists: The index in Manufacturing fell significantly, the industrial companies were at a high level significantly less satisfied with their current situation

Banks would suffer losses of £30B in stress test

(FR) ECB's Villeroy (France): Sees French GDP growth as fast as 1.7% in 2017

OPEC Sec Gen Barkindo: Outlook for Global Oil market is improving

(JP) Bank of Japan (BOJ) Gov Kuroda: Reiterates to continue with powerful monetary easing to reach 2% inflation as soon as possible - speech in Osaka

Currencies

Politics dominated currency trading as both euro and kiwi fell against their major trading partners following the German and New Zealand elections

USD/KRW won led gains as tensions eased on the Korean peninsula

Fixed Income

Bund futures trade at 161.69 up 53 ticks following the German elections and disappointing IFO release. Continued downside targets 161.03 while upside resistance stands initially at 162.07, followed by 163.27.

Gilt futures trade at 124.07 up 26 ticks following Moody’s downgrade on late Friday. Continued downside eyeing 123.26. Upside targets 124.90 then 125.24.

Monday's liquidity report showed Friday’s excess liquidity rose to €1.743T from €1.734T and use of the marginal lending facility rose to €122M from €116M.

Corporate issuance saw $16.7B last week via 31 tranches, bringing YTD issuance to above $1.04T. For the week ahead analysts forecast around $15-20B to come to market.
In Euro denominated issuance ~€26.9B came to market via 40 issuers and 48 tranches

Looking Ahead

07:25 (BR) Brazil Central Bank Weekly Economists Survey

07:30 (TR) Turkey Sept Capacity Utilization: No est v 78.8% prior

07:30 (TR) Turkey Sept Real Sector Confidence (Seasonally Adj): No est v 110.2 prior; Real Sector Confidence (unadj): No est v 110.2 prior

08:05 (UK) Baltic Dry Bulk Index

08:30 (US) Aug Chicago Fed National Activity Index: -0.25e v -0.01 prior

09:00 (CN) China Aug Conference Board Leading Economic Index

09:00 (MX) Mexico July IGAE Economic Activity (Monthly GDP) Y/Y: No est v 2.4% prior

10:30 (US) Sept Dallas Fed Manufacturing Activity: 11.5e v 17 prior

16:00 (US) Weekly Crop Progress Report

The euro has started the week with losses, as EUR/USD has dropped below the 1.19 level. Currently, EUR/USD is trading at 1.1885, down 0.52% on the day. Germany went to the polls on Sunday, and Angela Merkel won a fourth term as president. On the release front, German Ifo Business Climate slowed to 115.2, short of the estimate of 116.0 points. Later in the day, ECB President Mario Draghi testifies before the European Parliament Economic and Monetary Affairs Committee. There are no US economic releases, but we’ll hear from three FOMC members – William Dudley, Charles Evans and Neel Kashkari. On Tuesday, the US releases CB Consumer Confidence and New Home Sales. Federal Chair Janet Yellen will speak at an event in Cleveland.

Angela Merkel easily won the German election on Sunday, but will have to cobble together a coalition in order to form a government. Merkel’s Christian Democratic Union (CDU) won 33% of the vote, the Social Democrats (SFD) won 20%, while the Alternative for Germany (AFD) took 13% of the vote. The AFD ran on a far-right, anti-immigrant platform, and the party’s surge in support has sent shock waves in Germany and across Europe. Merkel is taking her trademark “carrot” approach to the AFD and its voters, saying she hears their message to the mainstream establishment and will work to make sure that their concerns are heard. The euro lost ground after the election results, and has weakened further on Monday, after a disappointing reading from the German Ifo Business Climate for September. The indicator dropped to a 3-month low, but the reading of 115.2 still indicates strong economic growth in the eurozone’s largest economy.

The eurozone is enjoying solid growth, with much of the credit going to Germany, the largest and strongest economy in the bloc. The German economy continues to perform well, with low unemployment, strong consumer demand, and a robust export sector. Institutional investors and analysts like what they see, as last week’s German ZEW Economic Sentiment Sentiment rebounded in September and climbed to 17.3 points, following a disappointing reading in August of 10.0 points. The ZEW report was very positive, noting that German growth in the second quarter remained strong, and both the public and private sectors were marked by increased investment. The report added that the stronger euro had not had a negative impact on the German economy, and the upcoming German election had not caused any uncertainty in the markets.

Although initially markets were positively anticipating the upcoming Draghi speech at Trinity College, but the subsequent reaction led to quite rapid recovery of the Dollar on Friday.

To certain extent, such bearish movement could be related to anticipation of the German Parliamentary elections. However, as soon as it became clear that Merkel managed to retain her post, the Euro started restoring previously lost positions.

From technical perspective, this upside momentum is likely to be neutralized by a combined resistance formed by the 55-, 100- and 200-hour SMAs together with the weekly PP at 1.1947.

On the other hand, Draghi's testimony at the European Parliament might create a new short-term volatility in the markets, which could give the pair a necessary impulse to bypass those barriers. In the opposite case, the rate is likely to fall to the bottom edge of a dominant ascending channel.

The speech delivered by Theresa May about post-Brexit relationship with the EU on Friday, indeed affected value of the Pound.

Unfortunately, the effect was negative and the British currency just in one hour lost 79 points against the Dollar. Probably the best description of this situation was made by the German Foreign Minister who noted that the speech was vague and did not contain any concrete proposals.

Accordingly, the rectangle pattern that formed in the beginning of previous week sustained and is likely to sustain today as well. On the one hand, the rate feels pressure from the 55- and 100-hour SMAs together with the weekly PP at 1.3536 that pushes it to the top.

However, the expected target for today would be an area around 1.3585, but not the upper edge of the formation.

Due to increasing hostile rhetoric between the US and North Korea about mutual destruction, the Yen got another momentum to try to return to the 111.38 level.

But this attempt was neutralized by the 100-hour SMA near 111.72. Because of this support, the buck started restoring its lost positions but once again failed to break above the monthly R2, which is located at the 112.55 level.

In the first half of the day, the pair is likely to fall towards a combination of the above 100-hour SMA and the updated weekly PP at 111.90.

Afterwards, the buck is expected to try to make a rebound and make another attempt to break through that strong resistance level.

But from a general perspective, the rate should enter into a clearly red zone.

In accordance with expectations, the surge of the gold price did not last for long, as the pair was turned around by the monthly PP located at the 1,300.00 level, which transformed from support into resistance.

At the moment, there are certain signs that the rate is going to try to climb to the top again. However, this new attempt is expected to fail due to presence of the 55- and 100-hour SMAs plus the updated weekly PP, which altogether additionally strengthen the above resistance level.

In addition to that, the further deprecation of the bullion against the gold is expected from a daily perspective, as the rate is fluctuating in a junior descending channel, which forms a part of a larger long-term ascending channel.

Stronger-than-expected economic reports for the Euro zone put the EUR/USD currency pair in the 1.1995 area for a while. The Euro rose against the Greenback by 19 base points or 0.16%, though an increase was offset by bearish reaction on the FOMC member's speech.

Markit preliminary report showed on Friday that the composite PMI registered the strongest gain in six years, as the index rose to the 56.7 in the month of September, up from 55.7 points seen in August. Then, the Euro held steady, while Mr. Draghi avoided commenting any policy-sensitive issues during his speech. From the US side, the FOMC Member John Williams said that he expected the Fed to raise rates gradually depending on the US economic performance.

The Canadian Dollar weakened significantly against the American counterpart, after the country's economic data missed expectations. Following the release, the USD/CAD jumped 53 base points or 0.43% to proceed strengthening to touch the intraday peak of 1.2351.

Statistics Canada revealed that the headline CPI for the country climbed 0.1% over the course of August, below expectations for a 0.2% gain, while the yearly rate increased 1.4% in the same period. Another report showed that Canadian retail sales rose more than anticipated 0.4% in July, as consumers spent more on cars, food and alcohol. Though, some disappointing data in the future could be to the detriment of Canadian dollar and BoC rate hike forecasts.

Monday September 25: Five things the markets are talking about

Weekend political results dominate Monday’s financial markets.

In Germany Sunday, Angela Merkel won her fourth term as Chancellor, but her Christian Democrats did not do as well as anticipated, while support for the far right AfD party surged. Her CDU party will now have to form a different coalition; most likely with the liberal FDP party and the Greens, after the SPD said it would not form another grand coalition.

Down-under, New Zealand’s general election on Saturday failed to deliver a clear result. Party leaders now have to forge alliances to achieve a ruling coalition, which could result in either another term for the current center-right National Party, or a win for the center-left Labour Party.

Note: On Thursday, Reserve Bank of New Zealand (RBNZ) is expected to leave the official cash rate on hold (+1.75%), to provide continuity given the current election-impasse and with a new RBNZ Governor at the helm.

Elsewhere, among the economic data to be released is August consumer-spending data for Germany and France, while in Japan there is a plethora of data out – consumer prices, household spending and retail sales, unemployment and industrial production – all for August.

Note: PM Abe is expected to dissolve the lower house of parliament at the start of the extraordinary session on Thursday, paving the way for a snap election for the lower house.

Stateside, the market will be focusing on the U.S consumer spending last month, data on Wednesday is expected to post the smallest gain in six-months.

Central bank speakers will also be keeping the market on its toes this week. ECB’s Draghi addresses EU lawmakers in Brussels this morning. Fed Chair Yellen speaks in Cleveland on Tuesday. Bank of Canada (BoC) Governor Poloz appears on Wednesday, while Bank of England (BoE) Governor Carney speaks Thursday, as does soon-to-depart Fed Vice Chair Fischer.

1. Stocks soft start to the week

In Japan, the Nikkei share average rallied overnight (+0.5%) as a weaker yen (¥112.15) again lifted exporters, while expectations of economic stimulus measures after an election next month supported overall sentiment. The broader Topix index also advanced +0.5% at the close.

Down-under, Australia’s S&P/ASX 200 Index ended unchanged, while South Korea’s Kospi index slid -0.4%.

In Hong Kong, the Hang Seng Index fell -1.4%, pressured by Chinese property developers slumping after several cities on the mainland tightened rules on home sales.

In China, a new round of government curbs to rein in the heated housing market hurt stocks. The blue-chip CSI300 index fell -0.5%, while the Shanghai Composite Index lost -0.3%.

In Europe, regional stocks are drifting higher as the session progresses, but political uncertainty following election results is weighing on sentiment. FTSE in focus after Moody’s cut the country’s risk rating late Friday (see below).

U.S stocks are set to open in the red (-0.1%).

Indices: Stoxx50 +0.1% at 3,546, FTSE -0.2% at 7,298, DAX +0.3% at 12,627, CAC-40 flat at 5,281, IBEX-35 -0.6% at 10,245, FTSE MIB +0.1% at 22,544, SMI +0.2% at 9,158, S&P 500 Futures -0.1%

2. Oil steady as market rebalances, gold lower

Oil prices have come under pressure from a stronger dollar, but have managed to retain most of their recent gains, supported by Friday’s OPEC meeting where producers said that they were making progress towards rebalancing.

Brent crude for November delivery is up +1c at +$56.87 a barrel, its highest since March, while U.S light crude (WTI) is down -20c at +$50.46, but not far off its recent four-month highs.

OPEC said Friday that output curbs were helping cut global crude inventories to their five-year average stated target.

Note: Production curbs have faced rising U.S shale oil output, while U.S energy firms have cut the number of oil rigs operating for a third consecutive week as a 14-month drilling recovery stalled.

Ahead of the U.S open, gold prices remain under pressure, trading atop of their one-month lows hit last week, as the U.S dollar finds some support and concerns over the Korean peninsula ease a tad. Spot gold is down -0.4% at +$1,291.60 per ounce. Prices of the yellow metal dropped about -1.7% last week.

3. Central bank speak to influence yield direction

U.K 10-year Gilt yields are little changed at around +1.365% following the British sovereign’s downgrade at Moody’s late Friday. The rating company cut the U.K’s rating to Aa2 from Aa1, citing a weaker outlook for public finances and “the erosion of the U.K.’s medium-term economic strength that is likely to result from the manner of its departure from the E.U.”

Note: Gilt yields have been surging from levels of around +1% in recent weeks on anticipation that the BoE will raise its policy rate as early as November.

In the Eurozone, periphery government-bond yield spreads are trading slightly wider following the German election. The 10-year Italian BTP-German bund yield spread trades +3 bps wider at +168 basis points, while the Spanish and Portuguese spreads over bunds are both +2 bps at +108 bps and +199 bps.

Elsewhere, the yield on 10-year Treasuries fell less than -1 bps to +2.25%.

4. Dollar gains some ground

Political results have dominated currency moves in the overnight session. The EUR (€1.1885) is trading down -0.4% after a strong showing by the far-right AfD party, even as Chancellor Merkel looks set to continue in the role. A three-way “Jamaica” coalition of Merkel’s Christian Democrats, the Free Democrats (FDP) and the Green party is expected, but negotiations could take some time.

Sterling has opened up a tad stronger, up +0.2% at £1.3535, as investors correct its weakness from Friday. However, expect gains to be capped after Moody’s downgraded the U.K to Aa2 late last week.

Note: PM May’s speech Friday does not seem to be an issue for the pound thus far – the PM really did not say much, but her tone seems to have definitely changed and is a tad more conciliatory.

The New Zealand dollar trades down -0.6% at NZ$0.7273 outright after an inconclusive election in New Zealand.

5. German business sentiment slips in September

Data this morning shows that German business sentiment slipped last month, albeit from a high level, as companies lowered their outlook, according to the Ifo Institute’s monthly survey, which was conducted ahead of yesterday’s German general election.

German Ifo business climate index fell to 115.2 points from 115.9 points in August. The market was expecting an unchanged result.

Lacking a majority in parliament, Ms. Merkel will need to build a governing coalition, and many political observers warn that the process could drag on for weeks.

In Germany, Angela Merkel won a fourth term as Chancellor. However, her party (CDU) did worse than most opinion polls suggested. The pro-EU SPD, Germany's second largest party, also gained less seats than anticipated. Critically, the SPD ruled out another 'Grand coalition' with Merkel's CDU immediately after the election. This suggests that Merkel will most likely have to form a coalition that includes the liberal FDP, which is against vital EU reforms such as a euro-budget, or any other form of risk-sharing across EU countries.

In our view, this outcome lowers the likelihood that EU reforms materialize, as any coalition government that includes the FDP will probably have reservations against deeper EU integration. The common currency opened with a modest negative gap, though it quickly recovered most of its losses in the next hours.

Even if the EUR remains under some pressure over the next days, considering the elevated speculation that the ECB is set to unveil a QE-exit plan next month, we doubt that any retracement in EUR pairs will be major or prolonged. The argument for a near-term correction lower in EUR/USD in particular is supported by the prospect of a small recovery in USD, as the Trump administration is expected to reveal an outline of its highly-anticipated tax plan this week.

EUR/USD opened with a negative gap, but the rate hit support near the 1.1890 (S1) level and the medium-term uptrend line taken from the low of the 17th of April, and then it rebounded. As long as the rate continues to trade above that trend line, the medium-term outlook remains somewhat positive. At the time of writing, the pair is testing the 1.1940 (R1) line, where an upside break may open the way for another test near the 1.2025 (R2) hurdle. Having said that, given that we have negative divergence between both our short-term oscillators and the price action, we would stay careful of a possible downside correction. A clear dip below 1.1830 (S2) may be the trigger for something like that and could initially aim for our next support of 1.1775 (S3).

NZD drops as political uncertainty mounts

In New Zealand, the incumbent National Party won the most seats as per the consensus, but fell short of establishing a majority in order to govern alone. At this point, it appears that the Nationals may have to form a coalition with the populist New Zealand First Party, which is anti-immigration and wants to renegotiate free trade deals. Adding to the uncertainty, is the fact that even though the Nationals gained the biggest percentage with 46% against Labor's 36%, a Labor - New Zealand First - Greens coalition could still be the next government if those parties manage to strike an accord.

The Kiwi opened with a negative gap and may remain under selling interest for a while on this uncertain outcome. The next possible market mover for the currency may be the RBNZ gathering during the Asian morning Thursday. Given the lack of major developments since the last meeting, we look for the Bank to remain on hold and keep its language broadly unchanged. Another round of concerns over the exchange rate could add more fuel to the NZD's pullback.

NZD/USD gapped down in the aftermath of New Zealand's election. The pair tumbled after it found resistance at the strong barrier of 0.7340 (R2), it fell below the support (now turned into resistance) of 0.7280 (R1), and hit support near 0.7245 (S1). Taking into account the election outcome and the rejection from above 0.7400 (R3) on Wednesday, we believe that the pair is poised to continue trading south. A decisive dip below 0.7245 (S1) could set the stage for more bearish extensions, perhaps towards our next support of 0.7190 (S2).

Today's highlights:

The economic calendar is relatively light, as we only get Germany's Ifo survey for September. That said, we have a plethora of speakers on the agenda. During the European day, we will hear from ECB President Draghi, Vice President Constancio, as well as Executive Board members Mersh and Coeure.

Market focus may be on any hints as to whether the ECB is headed for a 'dovish tapering'. Over in the US, New York Fed President William Dudley and Chicago Fed President Charles Evans are due to deliver remarks.

As for the rest of the week:

On Tuesday, we have no major events. On Wednesday, we get US durable goods orders for August, while on Thursday, during the Asian morning, the RBNZ will announce its rate decision as we noted above. During the European day, Germany's preliminary CPI data for September are due out. Finally on

Friday, we get Japan's CPIs for August, Eurozone's preliminary CPIs for September, as well as US personal income and spending for August.

EUR/USD

Support: 1.1890 (S1), 1.1830 (S2), 1.1775 (S3)

Resistance: 1.1940 (R1), 1.2025 (R2), 1.2100 (R3)

NZD/USD

Support: 0.7245 (S1), 0.7190 (S2), 0.7145 (S3)

Resistance: 0.7280 (R1), 0.7340 (R2), 0.7400 (R3)