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Europe Week Ahead: German Elections, -Ifo, -EZ PMI, -M3, INSEE Svy
As Germany goes to the polls on Sunday, the main uncertainty has not been lifted in terms of the composition of the next government, with the two most likely outcomes – a grand coalition between the CDU/CSU and the SPD, or the continuation of the current CDU/CSU/FDP coalition – still fairly close. According to the very latest polls, the CDU/CSU could score around 38% (slightly down from the past few weeks), the SPD 28% (slightly up), with both the left-wing party Die Linke and the Green party slightly below 10%. More importantly, the liberal FDP is not yet assured to reach the 5% to enter parliament (a failure would likely imply a grand coalition) while the eurosceptic party Alternative für Deutschland (AfD) could still hope to cross this mark (a success would also increase the likelihood of a grand coalition albeit with extra negative noise). Overall, we rule out any radical shift in German policies after the elections but at least the latter will be behind us, allowing the government to move on some key policy issues such as the handling of the Greek bailout programme or the banking union.
Next week will bring the usual end-of-month releases of key business survey data (PMIs, IFO, INSEE as well as national surveys), which in the current volatile context have the potential to move European markets significantly if we get surprised one way or the other. Overall we believe that the economic momentum will likely improve further into year-end, albeit at a more moderate pace than in the past few months. Negative factors weighing against this momentum include bond market volatility, emerging market jitters and geopolitical uncertainty. Moreover, we doubt that the pace of the recent increases in confidence can be sustained for long, given our own GDP forecasts, which look for moderate positive growth in H2.
Eurozone flash PMI indices should increase only modestly this month, supported by better exports and business prospects, including in the periphery. The improvement in the German IFO might still have legs on the back of better expectations components. The French INSEE survey likely consolidated at current levels, being still at odds with the weaker PMIs in particular.
Among other important figures to be released next week, attention will turn to Eurozone money and credit data. The contraction in bank credit supply to the private sector is likely to slow down at the margin, helped by more favourable base effects and a stabilisation in monthly flows. The global picture, however, is still consistent with subdued money and credit growth and thus should help to underpin the ECB's forward guidance. The same can be said for inflation, with German preliminary CPI data likely to be consistent with a further small decline in inflation rates in the region.
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Greece heads for new EU-IMF audit, hopes reforms will earn loans
A new EU-IMF audit of Greek fiscal performance and reforms begins Sunday, with the debt-laden country hoping progress in reining in spending will unlock further bailout loans.
The mission chiefs of the so-called troika of creditors -- the EU, IMF and the European Central Bank -- will begin the inspection with a meeting with Finance Minister Yiannis Stournaras.
Expected to end in October, the audit will determine the release of a scheduled loan instalment of 1.0 billion euros ($1.33 billion) from Greece's ongoing EU-IMF bailout.
In contrast with prior troika visits, Greece has made fiscal progress and recently announced a tentative primary surplus in the budget.
This could enable the Greek government to claim additional help for its recession-help economy from its European peers later this year.
A primary surplus is a state budget surplus excluding the cost of servicing debts.
The recession also seems to be easing, and there was a slight dip in unemployment rate due to seasonal tourism industry hirings.
"The signs of recovery are becoming clear," Stournaras told a conference this past week.
"No other country has achieved such a large (fiscal) adjustment in peacetime," he said.
The inspection comes during a period of heightened labour unrest and political tension after the murder of an anti-fascist musician by an alleged member of the neo-Nazi party Golden Dawn this past week.
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EUR/USD Forecast September 23-27
EUR/USD certainly enjoyed the surprising NO Taper decision by the US Fed, and jumped to a much higher range. Can the momentum continue as the focus shifts back to Europe? German Federal Elections, Flash PMIs and Draghi‘s speech are the main events this week. Here is an outlook on the market-movers ahead and an updated technical analysis for EUR/USD.
Ben Bernanke and his colleagues surprised with the decision NOT to taper QE. This boosted EUR/USD to levels last seen in February as the dollar retreated. Germans go to vote this week vote in federal elections, where Angela Merkel is expected to be reelected. However, she might have to settle for a grand coalition with the opposition rather than see a repeat of the current government, and this might cause uncertainty. German economic sentiment jumped from 42.0 to 49.6 points in August to the best level since April 2010, further evidence to the pick-up in the Eurozone.
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Bullish after conquering the 1.3451 Level
EURUSD: Having taken out the 1.3451 level, there is risk of a return to the 1.3600 level.
Further out, resistance resides at the 1.3700 level followed by the 1.3800 level. Its weekly RSI is bullish and pointing higher supporting this view.
Conversely, on a reversal of its current upside it could recapture the 1.3451 level. A reversal of roles is likely to occur here and turn it higher.
Support lies at the 1.3300 level followed by the 1.3200 level. Below here will aim at the 1.3165 level. All in all, EUR remains biased to the upside.
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Angela Merkel celebrates after German election
Angela Merkel has urged her party to celebrate "a super result" after exit polls suggested she was set to win a third term as German chancellor.
Her conservatives took about 42% of the vote, the polls said. TV projections said that might almost be enough for a historic absolute majority.
Otherwise Mrs Merkel might have to seek a grand coalition with the Social Democrats - estimated to have won 26%.
Her preferred liberal partners appear not to have made it into parliament.
Exit polls for ARD public television put the liberal Free Democrats (FDP) on 4.7%, which if confirmed would be a disaster for the junior coalition partner, leaving it with no national representation in parliament.
Party chairman Philipp Roesler called it "the bitterest, saddest hour of the Free Democratic Party".
The FDP was beaten by the Green Party (8%) and the former communist Left Party (8.5%), and even, according to exit polls, the new Alternative fuer Deutschland, which advocates withdrawal from the euro currency and took 4.9%, just short of the parliamentary threshold.
There was some speculation on German television that Mrs Merkel's Christian Democrats (CDU) and their Bavarian sister CSU might even win enough seats for an absolute majority - the first in half a century - if both the FDP and AfD fail to make it into parliament.
The ARD channel's projection had her group winning 297 seats against 301 for the other three parties, while ZDF had her dead even with the other three.
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Euro pares advance vs. dollar after Merkel win
The euro pared gains Monday that it made against the U.S. dollar after German Chancellor Angela Merkel won a third term to lead Europe’s biggest economy.
The euro EURUSD -0.14% had reached a high of $1.3554 earlier Monday in the wake of results that left Merkel’s conservative party with its best showing in more than 20 years.
The climb in the euro put the currency near its strongest level since early February, according to FactSet data. However, the shared currency eventually pared its advance to $1.3526 compared with $1.3523 late Friday.
Though Merkel scored a victory, her Christian Democratic Union bloc fell shy of securing an absolute majority in the country’s lower house of parliament, the Bundestag. Merkel’s likely option for a coalition partner appears to be the center-left Social Democratic Party (known by the German acronym SPD), which has been a critic of Merkel’s.
“By any yardstick, Angela Merkel’s result is excellent. Whether or not she will opt for a Grand Coalition with the SPD (or the Greens) remains an open question, but it will be one in which she will have the upper hand,” Société Générale global head of economics Michala Marcussen wrote to clients.
“Against this backdrop we expect Germany to pursue a similar policy with regards to the euro-area debt crisis, and this will entail further austerity and reform ahead,” she said.
Meanwhile, Société Générale strategists foresee the euro-dollar pair trading at $1.25 by the end of the year, which would offer euro-area exporters relief from concerns about persistent currency strength.
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Greece Begins Troika Negotiations For Next Loan Tranche
Greece's negotiations with its international creditors begin this week amid a difference of opinion in certain spending and revenue projections, a senior Finance Ministry official said Sunday.
Speaking to journalists after a meeting between officials from the European Commission, the European Central Bank and the International Monetary Fund and Greece's Finance Minister, Yannis Stournaras, the official said that the Troika initially agrees with the ministry's projections of a smaller recession for this year, with GDP is expected to contract by -3.8% instead of the official target of -4.2%, but the differences between the groups remain.
"The work for the 2013 issues will continue this week in order to reach an agreement," the official said. "There are different projections for four to five fields, some in revenues and two in spending."
The official also said that discussions will take place this week regarding the milestones needed in order for Greece to collect the next loan sub- tranche of E1 billion.
If the Troika assessment is not favourably concluded by October 14, when Eurogroup finance ministers meet in Luxembourg, Greece will not receive the funds.
The finance ministry official said that while inspectors acknowledge the fact that Greece is capable of achieving a primary surplus this year, the final determination could only be made with hard data.
A Commission source told MNI late Sunday that the Troika is "sceptical (of) a series of non standard and one-off measures used in order to achieve the primary surplus calculations."
"We want to be sure that the figures are correct and in order and (for) the impact of the measures to be permanent," the source said.
Both the Greek finance ministry official and the Commission source admitted that while the 2013 pending issues could soon be resolved, the 2014 negotiations could pose more significant problems.
Apart from the budget draft for 2014, Greece and its lenders must determine the financing gap, the fiscal gap as well as the precise structural measures that are yet to be determined but must be included in next year's budget.
"We are far away from 2014 (budget) because we still don't have conclusive figures from the general government," the finance ministry official said. "Once we have them, we can make assessments."
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Euro under pressure on German coalition concerns
The euro weakened against most currencies on Monday, hurt by worries about how long it will take Angela Merkel to form a coalition after her party's victory in Sunday's German election.
Merkel's conservatives fell short of the votes needed to rule on their own and may have to convince leftist rivals to join them in government.
The German chancellor's victory came at the expense of the Free Democrat Party, a coalition partner of Merkel's last government, which failed to get the minimum 5 percent vote to qualify as a recognized party. The FDP cannot therefore be considered for a coalition.
"The uncertainty surrounding what a coalition might look like and the road to get to one has left the euro softer," said David Starkey, FX market analyst, at Cambridge Mercantile Corp in London.
In early New York trading, the euro was down slightly at $1.3507, staying below chart resistance at last week's 7-1/2 month high of $1.3569. It fell 0.6 percent against the yen to 133.51 yen.
Data showing above-forecast euro zone private sector business activity this month gave the single currency only a slight lift. German manufacturing activity growth unexpectedly slowed, according to Markit purchasing managers' index (PMI) data
The euro has gained more than 3 percent against the dollar since hitting a low close to $1.31 on Sept. 6, and analysts said it could struggle to extend gains unless data consistently points to an improving euro zone economy.
"The euro has not rallied on the passing of the German election risk, likely because with this risk behind us, it opens up the opportunity for some of the more pressing and difficult challenges facing Europe to be discussed," said Camilla Sutton, chief currency strategist at ScotiaBank in Toronto.
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Bundesbank: German Economic Growth Likely To Continue In Coming Months
Germany's economic growth will continue in months ahead despite a fall in industrial production at the start of the third quarter, Bundesbank said in its monthly report on Monday.
The noticeable improvement in expectations for production and exports signal an upward trend in coming months, it said.
The extraordinarily good consumer sentiment persists, supported by slowing inflation and an overall good situation on the labor market, the bank added.
Further, Bundesbank noted signs of improvement in investment but a clear dramatic upswing is still lacking.
The Purchasing Managers' survey data released earlier in the day showed that activity in Germany's private sector economy improved further in September, helped entirely by strong improvement in business conditions in services.
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Euro falls as Draghi strikes a dovish tone
The euro fell broadly on Monday after European Central Bank President Mario Draghi said the central bank is willing to flood the market with cheap loans and euro zone interest rates should remain at current or even lower levels for some time.
Europe's common currency hit session lows against the dollar and yen after Draghi told the European Parliament that the central bank is ready to offer banks more long-term loans to keep money-market interest rates from rising to levels that could push inflation too low.
Draghi's remarks extended earlier losses stemming from worries about how long it will take Angela Merkel to form a coalition government after her party's victory in Sunday's German election.
"With euro at $1.35, the pressure on the ECB to be as dovish as possible is really accelerating," said Boris Schlossberg, managing director at BK Asset Management in New York.
"The unintended consequences of the Federal Reserve's no-taper move has come at the worst possible time when German manufacturing exports are beginning to slow. So I think monetary officials in Europe will do everything possible to try to dampen the rise in the euro."
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