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German election & inflation jitters...

Video Script

Hi everyone, there’s another big and potentially volatile week in September coming up in financial markets so I will do my best to help you prepare for it. We begin the week with a reaction to the German election, then European inflation data will keep the focus on inflation, while Evergrande and Fed tapering concerns continue to play out.


My focus for this week will be on the German election, where voting took place on Sunday September 26 and any repercussions should be felt in markets this week.


In recent times, German elections have been very stable and predictable with minimal market reaction. This one could be different because Angela Merkel is stepping down after 16 years as Chancellor. That means a new leader and new policies that can affect the European economy, international trade, and specific German industries - not to mention the stocks of the companies in those industries. I won’t delve into individual stocks but let’s look at what could happen to the DAX 40 index and the euro currency.


By the time you’re watching this video we should know who the next Chancellor is but might not know which parties will be in the government coalition. So what combination of coalitions are analysts expecting to be good and bad for markets? There are 5 parties in the running to be part of the government - two conservative which are the CDU and CSU alliance as well as the FDP. Two liberal parties - the SDP and Greens - and one more hard left called Die Linke.


First, the results that should be positive for the DAX index and for the euro:

One: A two party coalition of the CDU/SDP would be a continuation of the status quo so probably wouldn’t cause any upset.

Two: a 3-party coalition between the CDU / SDP and Greens is the most expected result and should mean a bit more government spending but the power split would limit very meaningful change.

Now, the results that should be negative for the DAX and euro:

One: Any coalition with Die Linke would create concerns about an anti-business climate in Germany.

And Two: a coalition with the FDP might mean a return of austerity policy and reduce the chance the EU recovery fund gets extended.


But remember with elections, there is the kneejerk reaction in markets and then the longer term impact on the economy, which are not always too easily to separate beforehand.


And guys, if you can take a second to click the like button for the YouTube algorithm! It really helps let more people see these videos.


OK let’s round off with the economic calendar. As I mentioned in the into, Eurozone and German inflation datapoints are probably the main ones to watch. It’s a delicate time for central banks including the ECB, which are making plans to taper bond purchases. The risk of a policy error is high. Central banks might either be wrong to start tightening policy as the economy slows down or they might have misjudged the strength of inflation, in which case they are behind the curve and need to speed up rate hikes. EUR/USD especially will move as markets try to predict which way the Fed & ECB pivot on monetary policy. Elsewhere, China data will be important to watch in the context of the issues around Evergrande.


Right thanks everyone, good luck trading this week and make sure to click on subscribe so you don’t miss the next episode of the week ahead.

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