Action Insight

Despite the general perception that the German election would be a boring game, the outcomes contain several surprises and should drag the process of deeper EU integration. Angela Merkel's CDU and its sister party CSU have secured 246, out of 709 seats in the new Bundestag, marking a decline of -65 seats from the 2013 term. With CDU remaining the biggest party, Merkel will no doubt be the Chancellor for a fourth term. However, it is challenging for her to form a coalition government this time. Back in 2013, the CDU/CSU formed a Grand Coalition government, with SPD as its junior partner. This time, with SPD's number of seats sharply falling to 153 (down -40 seats from 2014), the party has pledged that it would head into opposition this time. Indeed, the SPD during the election period had been complaining about the loss of popularity after forming coalition with CDU/CSU. Yet, Merkel has asked Martin Schulz, SPD's leader, to re-think. The Grand Coalition is expected to be the best for the financial markets, providing the least uncertainty and most favorable for deeper EU integration.

While the final result would be formally announced on October 7 (due to the complex arithmetic of the mixed-member proportion system), the available information confirmed that the centre-right National Party remains the biggest party but would again be shy of being a majority government. Worse still, it would also be challenging for Nationals to form a minority government with consent of smaller parities. While many believe that the most likely result would be a Nationals+ NZ First coalition, it is not yet a done deal as it is still possible for NZ First form a coalition government with centre-left Labors and left-wing Greens. With plenty of uncertainties remains and the populist NZ First likely be a kingmaker in this term, New Zealand dollar got hit, losing over -1% against US dollar and Australian dollar.

Euro gaps lower against Dollar as another week starts. Markets seem to be dissatisfied with Germany election result even though Angela Merkel won her fourth term as Chancellor. Nonetheless, loss in the common currency is limited and it quickly recovers. Meanwhile, Kiwi also trades lower after indecisive election results. Yen is mildly weaker and risk sentiments are steady even though US President Donald Trump continued his verbal exchanges with North Korea officials. Yen traders' are probably more on Japan Prime Minister Shinzo Abe's press conference for snap election, rather than the words of the two sides that are on "suicide mission". Sterling is mildly firmer as the fourth round of Brexit negotiations starts.

There were a lot of happenings in the financial markets last week. The more hawkish than expected FOMC announce was supposed to give Dollar a strong boost. But it was the resilience of Euro that's much more convincing. New Zealand Dollar ended as the strongest one leading up to Saturday's election. Kiwi traders should be given a relief after the ruling National Party won the election, even though without outright majority. On the other hand, Canadian Dollar ended as the weakest as recent consolidation continued. Yen and Swiss Franc followed as the next weakest in an era of global monetary stimulus exit.

Yen trades broadly higher today on resurgence of geopolitical risks. North Korea threatens to launch hydrogen bomb in Pacific Ocean, in response to US President Donald Trump's "total destruction" provocation, and new sanctions. But overall, Yen is the weakest one for the week so far with risk appetite and global monetary stimulus exit in the background. This is also reflected in Swiss Franc, which is the second weakest for the week. On the other hand, Euro reversed the post FOMC selloff and is occupying the top spot among major currencies. The common currency is also getting support from solid data. Dollar is firm too but the uncertainty over the tension with North Korea is limiting its strength.

Yen recovers broadly today while Asian equities are trading generally lower as geopolitics is back haunting the markets. Tensions between North Korea and the US escalated again this week after US President Donald Trump's threat of "total destruction". This was followed by an executive order by Trump to forcefully push through trade embargo with North Korea. Then, North Korea responded by pledging to strike back with with countermeasures, including the use of hydrogen bomb. Dollar is mixed today as the boost from FOMC faded. Aussie and Kiwi are under much pressure. Aussie is still feeling heavy after China rate downgrade. Kiwi is cautious ahead of election in the weekend. On the other hand, Euro is staying firm ahead of Germany election on Sunday. Sterling is mixed a UK Prime Minister Theresa May's high profile Brexit speech is awaited.

Despite the comfortable lead of Chancellor Angela Merkel's Christian Democratic Union (CDU) and its sister party, the Christian Socialist Union (CSU), in polls, Germany, as well as the EU, would never be the same again after upcoming German election on September 24. Merkel is on the course to pursue her fourth, and the last term, as the Chancellor. Her party is unlikely to form a government without forming coalition other party(ies). While the Grand Coalition (CDU/CSU+SPD as the junior partner), just like the one we have had since 2013 and between 2005-2009, is the most favorable to the economy and the financial markets, it cannot be seen as a done deal.

Dollar is maintaining most of the post-FOMC gains against other major currencies. But it's turning softer against Euro and Sterling today. Better than expected job data provides no inspiration to the greenback. While developments in USD/CHF and USD/JPY are bullish, GBP/USD shows the Pound is still having an upper hand against Dollar. EUR/USD is staying well above 1.1822 support zone and maintaining near term bullishness too. Nonetheless, it's the selloff in Aussie and Kiwi that catches most eyes. RBA Governor Philip Lowe's comments suggest that he's in no hurry to follow other central banks in tightening. But the main driver is S&P's downgrade of China's sovereign credit rating.

The financial markets responded to Fed's hawkish announcement overnight rather positively. DOW gained 41.79 pts or 0.19% to close at 22412.59. S&P 500 rose 1.59 pts or 0.06% to end at 2508.25. Both indices made new record high. In short, Fed's new economic projections showed that policymakers are still projecting another rate hike in December, and three more next year. Fed fund futures are pricing in 73.4% chance of a December hike, comparing to 57.7% chance a day ago, and 48.6% a week ago. 10 year yield rose 0.034 to close at 2.277, extend recent rebound from 2.034. Dollar is now trading as one of strongest for the week among Aussie and Kiwi. Yen and Swiss Franc are trading as the softest ones. Gold dipped lower and breached 1300 handle following Dollar's strength.

The Fed finally made formal announcement that it would begin normalizing the balance sheet in October. As indicated in June, the process does not involve active selling of securities, but a passive run-off of its holdings. The policy rate also stayed unchanged at 1-1.25%. The overall tone of the statement and the press conference came in more hawkish than expected. Depsite downward revision in the core CPI for this year, the staff upgraded the economic growth outlook and downgraded the unemployment rate forecast. The median dot plot continued to project one more rate hike this year, followed by three more increases in 2018. As CME's 30-day Fed funds futures suggested, bets for a December hike markedly jumped to 73.4% from 57.7% in the prior day.

Dollar jumps after FOMC kept the target range of federal funds rate at 1.00-1.25% as widely expected. Fed also confirmed that the balance sheet normalization program will be initiated in October. The Dollar positive parts of the announcement are firstly, GDP growth projection for 2017 and 2019 are revised up. Secondly, unemployment rate forecast for 2018 and 2019 are revised down. Federal fund rates projection for 2017 and 2018 are kept unchanged. That indicates Fed is still on course for another rate hike this year and three hikes next year. Nonetheless, core PCE projection for 2017 and 2018 are both revised down.

Dollar is trading broadly lower today as markets await FOMC policy decision and press conference. It's widely expected that Fed would formally announce the schedule of the long-awaited normalization of its USD 4.5T balance sheet. At the June meeting, the Fed revealed the plan to "gradually reduce" its securities holdings by "decreasing its reinvestment of the principal payments" received. More details are awaited as the plan is formalized. Inflation has remained persistently soft despite the upside surprise in the August data. We believe some members would raise concerns that weak price levels might last longer than previously anticipated. There might be downward revisions in the inflation forecast in 2018. Meanwhile, there are some speculations that the Fed might reduce its average Fed funds rates projections. Thus, the so called dot-plot will also be closely watched.

US equities surged to new records highs overnight as markets await FOMC's announcement on balance sheet normalization. DOW closed up 39.45 pts or 0.18% at 22370.80. S&P 500 gained 2.78 pts, or 0.11%, to 2506.65. 10 year yield also extended recent rebound and rose 0.014 to 2.243. But Dollar is trading generally lower in Asian session today. For the week, Euro, Aussie and Kiwi remain the strongest ones. Meanwhile, Canadian Dollar is under pressure as rate hike speculations cooled. Strong risk appetite in the market is pressuring Yen as the second weakest. Markets have little to response to US President Donald Trump's provocative talk to totally destroy North Korea.

The upcoming New Zealand election would be a tight race between the incumbent National Party and Labor Party. Polls of polls compiled by both RNZ and Stuff indicate that supports for both parties are at around 40%. Moreover, opinion polls have been suggesting that neither of the parties would be able to a government without forming coalition with smaller parties. This is such uncertainty that has increased the volatility of New Zealand dollar of late. This report compares the impacts of various scenarios on the economic growth outlook and the monetary policy, hence the exchange rate. We believe that maintain the status quo - a minority government led by Nationals- would be the most NZD-favorable, while a Labor + Green+ NZ First trio would lead to an immediate, but short-term selloff in the currency.

Euro surges to highest level since 2015 against Swiss Franc today as boosted by solid improvement in economic sentiments. But the common currency is overwhelmed by Aussie and Kiwi on strong risk appetite. Meanwhile, Sterling also regained ground after the pull back following BoE Governor Mark Carney's cautious speech yesterday. Dollar is generally softer as markets await FOMC policy decision and press conference tomorrow. In other markets, Gold is gyrating in tight range around 1310 but is vulnerable to another dip to 1300 handle. WTI crude oil is also struggling around 50.

Risk appetite continued to drive US indices to new records higher overnight. DOW gained 63.01 points, or 0.28% to close at 22331.35. S&P 500 rose 3.64 points or 0.15% to 2503.87. Both were at new records. 10 year yield also gained 0.027 to 2.229. Traders continue to raise their bet on a December Fed hike, with over 57% chance as indicated by fed fund futures. But the Dollar is not getting much support yet. Markets will have their eyes on tomorrow's FOMC decision on balance sheet normalization, and the post meeting press conference first. Meanwhile, Sterling and Canadian Dollar are both talked down mildly by respective central bank officials. Yen and also stays weak in risk seeking environment. In other markets, Gold is extending recent pull back and is pressing 1310. WTI crude oil continues to struggle around 50.

The RBA minutes for the September meeting contained little news. Four main areas of discussions include employment situation, Australian dollar, iron ore prices and the balance of household debt and low inflation. Policymakers acknowledged the improvement in the employment market, noting higher participation rate and steady unemployment rate. RBA appeared less worrisome about Aussie’s strength. By attributing the appreciation of the Australian dollar to USD’s weakness, it appears less likely that RBA would take actions to curb its strength. RBA expected iron ore prices to fall amidst new supply. As the biggest exporter of iron ores, Australian dollar has been affected by the movement in iron ore prices.

Yen trades generally lower today in otherwise quiet markets. Euro is trading firmer while Sterling is paring some of last week's sharp gains. Global markets are generally in risk seeking mode. The MSCI Asia Pacific ex Japan index surged to decade high earlier today. European indices follow with some gains, including FTSE. US futures also suggest that stocks are going to extend the record run. If other markets, gold continues with it's pull back from recent high at 1362.4 and hits as low as 1314.5 so far. It's possibly heading back to 1300 handle, which is close to 55 day EMA at 1293.4. WTI crude oil weakens mildly as it struggles to find sustainable buying to stay firm above 50 handle.

Politics and central bank events will be the main drivers in the markets this week, with economic data taking a back seat. FOMC policy decisions and press conference is one of the main highlights. Fed is expected to finally announce unwinding of its USD 4.5T balance sheet. But spotlight will first be on BoE Governor Mark Carney's speech at IMF in Washington. Markets will look to Carney for his view on the chance of a November hike. Meanwhile, Germany and New Zealand will have their general elections the coming weekend. Talking about elections, Japan Prime Minister Shinzo Abe might announce to dissolve the Lower House and call for a snap election. UK Prime Minister Theresa May will deliver a Brexit speech in Italy on Friday. And there could be more verbal exchanges out of UK and EU ahead of the fourth round of Brexit negotiation starting next week. And, let's not forget also US President Donald Trump will address the United Nations in New York on Tuesday when North Korea tensions are still present. Trump is given a chance to confront North Korean representative face-to-face.

British Pound ended as the strongest major currency last week as boosted by hawkish BoE announcement. A November rate hike by BoE is now a real possibility. Kiwi ended as the second strongest in spite of some volatility ahead of generally election. Dollar followed on revived speculations of a December Fed hike. Meanwhile, Yen ended as the weakest as markets on return of risk appetite. US equity indices made records highs while strong rebounds were seen in DAX and CAC. FTSE was the exception due to BoE rate expectation. Yen is also additionally pressured as markets are back looking at diverging global interest rates.