German Election Result & ECB Sintra Conference

Hello, good morning, and welcome to The Briefing. Here it's the 27th of September, and as you can see, Anthony Cheung is not with us, so you're going to be stuck with me this week to make sure you're up to speed on all things macro. So straight into it, because as you can see here, we've been locked in on the German elections over the weekend, and we have got a result of sorts, except don't get too excited because we're probably not going to have a German government formed for probably, well, who knows, could be months yet. And I'll explain why now, because here are the results with the SPD party just sneaking it with a 25.7% of the vote, which does mean, of course, that Angela Merkel's party, that's the CDU party there, coming in at 24.1%. I mean, for Merkel's party, just to put it into context, as you can see, a massive swing. In terms of losing, minus 8.9%. And 24.1% for the CDU party is the worst result in a national election in its entire history. So as Merkel is swanning off into the sunset having led the country for 16 years, looks like she's not leaving her party in any good position, and looks like they're going to be out of power. However, we'll see how this goes because the SPD have sneaked it. But look, obviously no one's anywhere near a— an an outright majority, so we're definitely having a coalition. And if you're up to speed on your German politics, then it's all about— it was, well, the debate was Jamaican coalition, or is it going to be the traffic light coalition? And basically this was talking where the Greens and the FPD party, those two parties, would definitely be the junior members in the broad government coalition. It was just down to who would be the big brother, and would it be SPD or would it be CDU? And for now, the SPD have sneaked it. The the colors of the three parties making up then the Jamaica Coalition would have been CDU with the Greens and the FDPs, and obviously traffic light is SPD. So with the SPD, I mean, this is Olaf Scholz, who's the leader there, definitely the most popular of the two candidates from the big parties, I would say. Armin Laschet of the CDU party, Merkel's kind of replacement has just been a bit uninteresting, not particularly inspiring in terms of as a character. So certainly Scholz here, I would say, is the front runner, although in the kind of aftermath of the election in the early hours of this morning, Laschet is still insisting that they're potentially in the running. Because what happens now is these parties need to negotiate to try and form a coalition. Normally what happens is the lead party, the person, the party that gets the most votes, then has the first right. To attempt to form a coalition. But of course, there's some big differences in policy between these parties. And so can the SPD form a coalition with the Greens and with the FDP party? And we're going to see in the weeks ahead. And it may be that they fail to agree, in which case there is still an angle for the CDU party to come in and then be given a mandate to try themselves. But the point is that this German election, whilst it's over in terms of the voting, it's really only just beginning. And markets aren't particularly responsive to this this morning. I mean, I'll go across and we'll have a look at the DAX chart here. You've had a little pop to the upside. You might say that the SPD party may be marginally more market favorites, but there's not too much in it. And anyway, there's not much market reaction simply by view of the fact that we're not expecting a result here and a government being formed for maybe months. So that's what's on the ticket for the weeks ahead. It's how are these negotiations going between these parties and ultimately what's the government going to look like when, when actually it does ever get formed. I mean, obviously this is a big turning point, a big moment for Germany from a political point of view. Merkel has been in charge, as I said, for 16 years, putting her as the third-ever longest chancellor of the German nation. But, you know, I'd say kind of Merkel's sort of, let's call it, comfortable and cautious style of politics has probably meant that there's been perhaps underinvestment in a lot of things related to the German economy over the last sort of 15 years while she's been in power. And so there's a, there's a lot to kind of pick up on. And, you know, through no fault of Merkel's, I think her term will be remembered for crisis management rather than, you know, economic and political reform and really modernizing and pushing the nation forward. It's been about dealing with the financial crisis Then we had the eurozone debt crisis, then we had the refugee crisis, then we had the coronavirus pandemic. I mean, to be fair to Merkel, it's been one after the other, and she has been a safe pair of hands through a crisis. But I'd say they probably slipped into that mindset of kind of crisis management has become that substitute for initiative and kind of investment. So, you know, they've been very sluggish to reform their pension system, for example, and this is what we should be expecting the SPD leader now, Scholz, to be kind of pushing on and setting out agendas to reform that pension system. Obviously Germany got an aging population, and so that's a concern. Um, they're a bit— they've been sluggish on the climate change front, they don't spend enough on defense, and XYZ. Okay, so there's lots to come here, but from the— even though the headlines are all about German election this morning, I don't think the markets are particularly interested. We have a look at the euro here, which has come off a little bit, I guess, but we just broken down below the low point that we had Friday afternoon. So just a little bit of a technical move. Not hard. Look, we've moved— when I say moved down, we've dropped sort of 20, 30 pips here. So given we've had a national election, this movement isn't really of any note whatsoever. We're kind of just eyeing up that low point that we had back last week down around the 1.17 handle as the kind of key technical for that euro. But yep, so the German election is done. I mean, let's just kind of step back, I guess. Because we'll come back and have a look at the euro because I want to talk about what's ahead this week. And certainly one of the big things is the ECB Sintra Forum. This is the ECB's forum on central banking. It's like the ECB's Jackson Hole, if you like. But before we do that, let's just take a look around markets and we'll have a look at the general mood and the vibe here. This is looking at US stocks. This is the S&P 500. And as you can see, Overnight through the Asian session, we've been tickling higher and we've now pushed up and moved above that high point that we had last week. If we just quickly move to a daily chart here, you can see we've got a little bit of work to do in terms of getting back to the all-time highs that were set back on the 3rd of September. If I just draw a line in there, you know, that's upper— I just, you know, we did move above that 4,500 handle for a few days, for about a week or so. Then that really the momentum— just look at the number of dojis through here indicating that that momentum to the upside was, was really running out of steam. And then we've come off, of course, and we sold off off the back of Evergrande. And but as we were talking about in the podcast last week, that's kind of, you know, the S&P's recovered the sort of, let's just call it, the Evergrande sell-off. And now we're kind of back to square one. And it's kind of where do we go from here this week? And whilst, yes, we're, you know, positive sentiment here this morning, you know, without, you know, getting too excited about anything. But it may be that we kind of now see this S&P just push on towards the, the kind of upper end of this range, and that being up above the 4,500 handle. And we just check in on the Nasdaq because the Nasdaq, very similar pattern here, of course, with the high all-time highs back at the start of September and then the Evergrande sell-off, and we kind of recovered that. So these two markets, they started the week reasonably positively other than the German election stuff. Not too much to really discuss on the sort of international front by way of major, major moves. I mean, obviously here in the UK, from a domestic point of view, we just drill in and have a look at the pound here. Let me zoom in on a slightly shorter term. Lots of— I mean, if you're in the UK, then been a bit chaotic over the weekend with massive queues outside petrol stations as the nation panics that we're going to run out of petrol. And this is all due to an HGV lorry driver shortage. And, you know, it's turning into a bit of an emergency. Whilst, you know, fuel supplies perhaps weren't anything to get worried about, they kind of are now because everyone's panicked and bought all the oil— sorry, all the petrol. So Boris Johnson thinking about emergency measures about bringing in the army, and the military, he's kind of waiving visas on the, you know, to get people from outside the country to come in and drive these lorries. And so it's been a little bit of a funny weekend on that front. But as you can see here from the value of the pound's point of view, you know, we've opened pretty much where we closed on Friday. We came off a little bit during Friday's session, but actually markets don't really care. So it's one of those things that whilst you're out there on the streets you know, in the economic system, if you like, and you're seeing stuff happen and you're like, wow, okay, this is something weird kicking off here. But, but actually, from an economic point, at this moment in time at least, not too much concern. Now, of course, we need to monitor that, you know, can the government implement some emergency action to make sure that petrol stations don't run out? Well, obviously we'll see, but at the moment markets are reasonably sanguine. To that. But if, if we do have a fuel crisis, then obviously this will start to have a genuine negative economic impact, but it's only ever likely going to be very short-term and maybe won't happen anyway. So for now, markets are reasonably calm. The other thing then to talk about is what's going on this week. And actually, let me just bring up the, the weekly calendar. And we just can have a look through and we can talk through and I'll come back to the charts in a second. I'll just increase the size of that for you. So here we go today. With regards to today, it's probably the least interesting from a kind of data point of view. You've got some money supply figures out of Europe. Right, right now as I speak, actually, these are hitting the wires, but not— I don't think these will have any impact. Not much from the US this afternoon either. These data releases, durable goods, never really moves the needle. You got Lagarde talking, but you know what's going to happen this week is got— we've got a huge amount of monetary policy speak, and this is because of the Sintra Forum, which is due to kick off tomorrow, by the way. So we'll see, we'll get a text release on this today at 12:45. Well, that's from her parliament— sorry, this is Lagarde talking at the European Parliament Economic Committee, I should say. But I would say she's gonna probably hold back. It'll be interesting to see what's in this text release, but she's giving a big speech tomorrow to really open that Sintra conference. And what are we expecting her to say tomorrow? I mean, she's been quite vocal in recent weeks. So she was on CNBC last week and she said that volatility in energy prices could persist for longer than existing COVID-related supply issues. So just perhaps hinting towards how she expects maybe that inflationary situation to be less transitory than we had originally hoped. She went on then, she was in a press conference on the last ECB meeting back on the 9th of September, she said that the euro area economic rebound was in an increasingly advanced stage and output is set to exceed pre-pandemic levels by the end of this year. She was talking about how, you know, whilst we got reasonably upbeat— and I guess this is one of the interesting things at her speech at the start of the Sintra conference— she used, she used that opening speech last year to, to definitely cover an economic update. And it'll be, you know, interesting to hear. Certainly there's some positive noises about Europe. I was talking on the podcast a couple of weeks back about how Morgan Stanley particularly have gone quite bullish on Europe. They're expecting Europe to outperform the US, and that's just because Europe are a little bit behind the US from that COVID recovery perspective. So whilst the US have gone through that accelerated rebound post-unlocking, mainland Europe haven't really had the full stint of that yet. So we are expecting an acceleration in growth in Europe. And then when you're looking at the valuations between things like European stocks and US stocks? Well, actually, they're at the largest ever divergence, with Europe looking cheap and the US looking expensive. Also, you're getting a nice tasty yield on European stocks these days of north of 3% if you're looking at the Euro Stoxx 600. And when you compare that to a German Bund yielding -2%, that's a 5% spread there, which is again a record high. And that delivers real value in the equity space. So it'll be interesting to see how upbeat Lagarde is about Q4 and of course going into 2022, and whether that marries together or not with that view of people getting a little bit more, or having a bias towards Europe with regards to stock asset allocation, you know, rather than the US, which is looking overvalued a little bit. We'll see. Also, we want to hear about how they're going to be winding down their PEP program. This is the ECB. That— the PEP program was the Pandemic Emergency Purchase Program. So obviously, as we come through the back end of that lockdown phase, then clearly it's time to step that down. And what we want to hear is how will they, you know, return back to their asset purchase program, you know, in order to bolster, you know, what is the kind of infancy of that kind of economic post-COVID economic rebound. So it'll be PEP winding down PEP, what does that mean for the APP program. And last year, Lagarde at this Sintra Forum, she did use it as a platform to definitely talk about policy. So we're expecting possible, you know, interesting comments from her. Also, it's not just Lagarde either. And actually, if I skim down, sorry, and let's have a look into, uh, where are we, Tuesday session. And, and this will be when the SINTRA conference starts on Tuesday. Let me just scroll down so you can see here we've got a load of news that are expected around about 2 PM. Okay, so that'll be the time to kind of get onto the newswires and see what's going on. But this is a two-day conference, and it's not just, as I said, not just Lagarde that's talking. We'll also have a panel discussion. It's the, the most heavyweight monetary policy panel you can possibly imagine, because on the panel will be ECB's Lagarde, will be Fed Chair Jerome Powell, will be Bank of Japan Governor Kuroda, will be Bank of England Governor Bailey. So you got the kind of the four, the big guns, if you like. Now that sounds really exciting and wow, we might get some fireworks and we might get some really interesting comments and maybe markets are going to be volatile. But I just kind of rein in that expectation because these guys lined up on this panel last year and they didn't really use it as a platform to talk about their own individual policy specifically. But you never know, right? So we've got to be— make sure we're monitoring newswires through this week when it comes to all things Sintra and monetary policy. Let's go back to the charts here. Let's have a look at the— let's have a look at the commodity complex, because you certainly need to be keeping your eyes on crude oil. So what's happened overnight? Well, we've ticked on, we've ticked higher, and this has been a theme certainly over the last few weeks. As you can see, let me just draw that line in from, from Friday's high there that we've taken out technically. And this has taken us up and kicked us up above $75 very briefly, just tailing off a little bit. So another step higher. It looks like this upward trend has legs to go. The really important thing about this move from a technical point of view, at least, is we're right up here testing the July highs. And also importantly is looking back at the very long-term chart, 2015. So we're up above the 2015 highs up here as well. And, you know, technically this is quite important, I'd say. And if, you know, we do get the continuation of COVID fears reducing, for example, case numbers in India over the weekend, were announced at the lowest levels we've seen for 6 months. So really positive kind of trends, downward trends, starting to form in, in some of these, you know, hugely populous areas. So if that happens through Q4, then on the demand side, things might pick up a little bit, and this could well help to push oil onwards and upwards. And, you know, as I said, technically we're at really key areas here. The summer's high around here, the 2015 highs. If we can push up above, let's say, $75.50 and sustain that, then really, you know, you're kind of starting to look up to numbers like $80 even, which are kind of price points we haven't seen for years. So, you know, expect this to feed through quite positively to the energy sector stocks, for example. So keep an eye on oil. That's broken again higher and continues this upward trend. Gold's been a funny one and it's been a bit lackluster. Even during the Evergrande events last week, gold really didn't take much interest to that, and it kind of just languishing around that $1,750 area this morning. If I go to a daily chart, you can see it a bit more broader context. We had a big sell-off back at the start of August, but that kind of then stabilized. And what what's been a great kind of resistance area was that kind of triple top that we had in, in July and then into the start of August. And that really capped the upside of this rebound that we saw. So that September high, bang on those levels. So really powerful sort of technical area here around $1837. So that held firm and we kind of drifted off. But yeah, gold's kind of been drifting to the downside. We'll see. I mean, if we flick back and have a look at the euro-dollar, Then the dollar has been strong, of course, which certainly is one of the key things that's driving that gold price or keeping it under pressure and preventing it from moving higher off any of these kind of safe haven events like Evergrande. Whilst we're here on this euro, you know, do make sure you're aware of these technicals. The low we had in August at 1.1686 is key. We managed to kind of just stay above that all of last week, although flirting with it on a couple of occasions. So just keep an eye on that today. And obviously when we go through into the Sintra events with Lagarde's opening comments, then obviously the euro is of course potentially sensitive to any of that. What else is going on then this week? If we flick back to the calendar, we've got data-wise US consumer confidence figures that are coming on Tuesday afternoon at 3 PM in amongst all the monetary policy speak. You can see Lagarde there is at 1 o'clock, live. Beyond the Pandemic: The Future of Monetary Policy is the title of her speech. So that'll be the key kind of moment, I guess, for the conference, as well as then that panel discussion with all the kind of big central bank speakers coming together. So yeah, lots of ECB chat, lots of Fed chat. Also, Yellen may be talking about debt ceiling issues. So that's going to start to rumble on. Concern, of course, that we might go through another debt ceiling crisis episode like we did a few years back. So certainly expect to hear more from Janet Yellen in the coming weeks, and that'll all come to a head, you know, towards the middle to end of October. Okay, so all that, that'll become a bigger and bigger issue, but as a few years back, it's an issue that will get resolved. And so may cause some short-term worry but ultimately shouldn't have too much of a long-term impact. Now if we scoot through to Wednesday and have a look down here, we've got some data coming out of the eurozone with consumer sentiment and consumer confidence. And then, yeah, the other big thing is then Japan and Japanese politics. It's not just Germany that are changing leaders or indeed changing a party. Even in Germany. In Japan, it's just changing leaders for now. Suga's stepping down. His, uh, well, his popularity rating post-COVID collapsed, and so he decided to fall on his own sword, resign, step aside. So we've got a party leadership race. It's expected to be a guy called Taro Kono. He's the front runner, and he's the most popular out there amongst the public, at least. He's quite an interesting figure, very experienced. Interested. He speaks fluent English, studied at university in the US. He's a former defense minister, former foreign affairs minister, so, you know, incredibly experienced and certainly on paper would fit the job very nicely. In terms of his policy stance, well, he would probably— well, he said in the past that Japan cannot change monetary policy radically due to the pandemic hit to the economy. Of course, Japan, again, a little bit behind the West in terms of their recovery from COVID and unlocking. You'll remember this from how it impacted the Olympics, of course. In terms of his tax side, he said we must offer tax exemptions to companies that boost distribution of wealth to workers. Well, any, any new kind of ideas on stimulus packages, he said that the focus would be on prioritising 5G, and renewable energy. So that's, that's coming on. So we should, we should hear results from the Japanese elections. I'm sorry, yeah, the Japanese leadership race this is. There's then actually a general election in November. So even though this isn't a kind of general election for prime minister, ironically, it probably— whoever wins this leadership race will become the prime minister because they become the leader of the the dominant political party in Japan. So it's a pseudo-general election in a way. Um, excuse me. So as you can see here, look, plenty of, uh, money— monetary policy overload, uh, this week, pretty much every day. Um, and Powell and Lagarde and Caruda and Bailey, they'll be on that panel. As I said, that's kicking off at 4:45, uh, London time, uh, on Wednesday. So make sure you're glued in on that. You never know. I'm not expecting big Fireworks from there, but you have to be tuned in just in case. Uh, scooting through to Thursday, things start to get a bit more punchy on the economic data side here. Past Sintra now, that'll be behind us, and now it's squarely China. And we've got some key manufacturing figures coming out of China. Of course, concern about how the latest kind of Delta, uh, impact— Delta variant impact— has kind of just slowed and damaged Chinese growth momentum. Obviously, we've had the Evergrande saga, which is still rumbling on, by the way, and clearly that's knocked confidence and sentiment. And certainly people got huge amounts of wealth tied up in property, and they're really worried about prices now. And obviously, this is going to impact their, their, their, their desire to get out and consume as a consumer. So certainly some, as we head into the back end of 2021, China's definitely becoming the biggest concern from an overall economic perspective. And obviously Evergrande being that kind of key headline story that encapsulates all of that. But we've seen figures out of China worsening, and so, you know, we want to see if that worsening trend on the data front is going to continue or not. So really important data out of China on Thursday morning. Probably topping that bill is, yeah, here the Caixin Manufacturing PMI, which dropped below 50 last month and it's expected to stay below 50. But it'll be interesting. It is expected to recover marginally from last month, but any number, let's say, below 48.8 this month— dare I say below 48— and then really it will continue to stoke those concerns about China. And then moving down, Um, uh, we, yeah, we've also got some key unemployment figures out of Germany, UK GDP figures as well, unemployment data. Then, yeah, on, on Thursday afternoon we got German CPI figures, which will be key because if— when I scroll down, US GDP figures, this is the final reading for Q2 though, so no real interest here in terms of that moving markets. Chicago PMI might be of interest, but what will feed through, obviously more speakers, but into Friday's session, uh, the big Tankan surveys out of Japan that are always important. But yeah, the big figure kind of from, from the Eurozone and Germany will be the final kind of PMI readings here, but the key one is going to be this the European flash inflation print. We're expecting it at 3.3%. If I just show you the chart, what's happening— it's a bit delayed. As I said, Europe's been lagging the US, it's been lagging the UK in terms of COVID recovery, and that certainly is the case for this inflation spike as well. So whilst the US had this kind of inflation spike began a few months back, and we've maybe even seen the peak of that and it's it's coming back down again. The UK have gone through the beginnings of that inflation spike, but we're similarly here, the Europe, we're expecting it to step up again here. And so obviously this will, you know, shape potentially Lagarde's comments. So be interesting to see what she thinks about this. Unfortunately, Sintra is coming just before this data. We're expecting inflation to again push higher, but there'll be wanting to stress it's transitory, of course, and trying to, you know, calm markets. So that inflation figure out of Europe at 10 AM on Friday is really important. And then we got the core PCE readings, and we got the manufacturing— ISM manufacturing figures out of the US on Friday afternoon as well. So some, some important data sets here, you know, at the end of the week. So really, just to kind of wrap then, I guess it's it's kind of mainly a monetary policy focused first part of the week. All eyes on Sintra, then it shifts to China in terms of data on Thursday morning, and then key inflation data out of Europe on Friday morning, and then some, some big figures out of the US on Friday afternoon. Okay, so that's the week ahead. Enjoy. That's it for today's briefing. Thanks a lot.