Fundamental Analysis

CAC Dips as Merkel Limps to Victory in German Election

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The CAC index has posted losses in the Monday session. Currently, the index is at 5,264.00, down 0.34% on the day. On the release front, it's a quiet start to the week, with no eurozone or French indicators on the schedule. ECB President Mario Draghi testifies before the European Parliament Economic and Monetary Affairs Committee.

European stock markets lost ground in the aftermath of the German election on Sunday, and the CAC has started the week with slight losses. Angela Merkel's CDU won 33% of the vote in the German election, which means that Merkel will have to enter arduous negotiations with other parties in order to form a coalition government. The center-left SFD, which won 20% of the vote, has already said it will not join the CDU, so Merkel has her work cut out for her. The far-right 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. The AFD cannot be considered as a coalition partner, which leaves the Greens and the pro-business FDP party as the most likely configuration. However, the FDP has insisted on the powerful finance portfolio and will likely try to reduce German transfer payments to the European Union. If the pro-business FDP does join the coalition, this could ice Macron's plans to strengthen European integration. Christian Lindner, the leader of the FDP, called for Greece to return to the drachma, underscoring the party's opposition to Germany continuing to prop up weaker members of the eurozone.

Emmanuel Macron ran an election campaign which promised to overhaul the French economy, and the government announced a labor reform that will make it easier for employers to hire and dismiss workers. Unsurprisingly, France's largest unions have pledged to fight the move tooth-and-nail, and tens of thousands demonstrated in Paris on Saturday. The government has promised further reforms to the country's generous benefits system, specifically unemployment benefits and pensions. Previous governments have tried to streamline the economy in the past, but mass strikes and demonstrations by unions have managed to stave off major reforms. Will Macron succeed where his predecessors have failed? The new government appears determined to move full speed ahead, and the markets will be watching closely to see who prevails in this round, the unions or the government.

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