Pro-EU view on Merkel Win
The primary headline of Angela Merkel winning a historic 4th term is the one that will likely drive market activity. Despite disappointment over lost votes from CDU/CSU and SPD, the rise of right wing populist AfD and questions over the exact government make-up, the outcome of yesterday Bundestag elections will be pro-Europe, centrist, coalition government. Yes, there are granular uncertainties which will delay Germany’s role in great EU integration, but Merkel has indicated that a coalition agreement should be reached by Christmas. EURUSD reacting calmly, with marginal USD strength, but trading well within its recent ranges. EURCHF move higher indicates that the overall result of the German election is broadly pro-Euro.
Moving forward, given the decline of popularity in the SPD the most likely coalition under Merkel would be CDU/FDP/Greens. Already we are hearing a reversal of FDP language post-elections sounding pro-Europe. While the Greens in the past have call for Euro-bonds, which would solve many of the uncertainty around EU funding. If you take the results of yesterday German elections and combine with French President Macron EU reform vision positive political backdrop for European investors. For the first time in a long while, European politics is likely to drive the Euro higher. There are risk in the horizon with Macron falling popularity rating and weakness of party in Senate elections, Italy elections and Spain/Catalonia (significant risk escalation, in our view, as Madrid moved to take over local policing), but in the near term, we would manifest our strong Europe view through long EURCHF on any pullbacks.
Markets is showing a risk-on stance
The sentiment seems to be back to bullish. Gold keeps on declining and is now below $1300. North Korea tensions are still there but markets seems not to worry much on a possible escalation. The dollar has been recently strengthened after weakening since the start of the year.
At the moment, we consider that asset pricing are more sensitive to central banks than geopolitical risks. Markets are buying the Fed balance sheet reduction and this explains the current sell-off in Gold. Within the short-term, we should see the EURUSD pair consolidating below 1.20. It is going to be very difficult to put an end to the Quantitative Easing without provoking further turmoil on the market.
We believe that current levels are good to reload gold positions. Optimism is, according to us, way too strong regarding central bank especially knowing the number of times it has disappointed over the last few years. Central banks need to guarantee price stability and we assume it is going to be very difficult. Debts are way too important. Gold is definitely selling at a discount right now.
