(29 OCTOBER 2018)DAILY MARKET BRIEF 1:German Groko coalition under threat

Following weaker PMI in manufacturing and composite (i.e. industry and services) given at multi-year low and an unexpected slowdown in Ifo business climate indicator for the month of October, it appears that German GDP growth stagnated in the second half of 2018, after Q2 y/y figure estimated at 2.30%.

Indeed, as the Eurozone is facing the same downward trend due to continued drop in exports along with continued geopolitical issues, German politics is showing signs of exhaustion. After losing more than 10% of suffrages in Bavarian state election two weeks ago, the big coalition “Groko” ( composed of CDU/CSU and SPD) lost a significant amount of votes in Hesse, losing more than 20% of prior year votes (CDU/CSU: -11.30%, SPD: -10.90%), putting additional pressure on German Chancellor Angela Merkel and undermining the Berlin coalition. This ultimately raises questions from investors who wonder whether Germany will be able to maintain a stable government.

However, despite current situation, there is a rather small likelihood to see left- or right- populist party taking the lead, unlike Italy’s anti-establishment coalition, thus not causing systemic risk for the monetary union.

Accordingly, the EUR/USD current drop remains mainly German state election induced. We therefore expect the single currency to weaken further along 1.1360 short-term.

By Vincent Mivelaz