Euro See-Saws After German Coalition Talks Break Down

November 20, 2017

In Germany’s national parliamentary election on September 24, the center-right Christian Democratic Party of Chancellor Angela Merkel won it smallest share of the vote since 1949, but its center-left grand coalition partner, the Social Democratic Party, also suffered big losses and got its smallest voter share since the Second World War. The SDP had ruled out continuing participation in a grand coalition, and Merkel had been trying to forge a four-way coalition with the regional Christian Social Party of Bavaria, the environmental Green Party, and the Free Democrats, a pro-market fiscally conservative but liberal party on social issues.

Very late Sunday night, the FDP abandoned the coalition-building talks, depriving Merkel of any chance to form a majority ruling government. For now, she will proceed as an acting Chancellor, continuing Germany’s existing positions related to its membership in the European Monetary Union. Commanding only a plurality of parliamentary seats, such a minority government is likely to prove intrinsically unstable, and the possibility of needing to call a second national election soon looms. This raises the specter that just as in the United States and Great Britain, the political fabric of central Europe might unravel over rising populist forces.

The euro in response fell 0.7% immediately to as low as $1.1722, but by 09:00 GMT on Monday had recouped all its initial losses against the dollar. The euro had traded firmly last week on rising confidence in Euroland’s economic recovery. Greater-than-anticipated Ezone growth — exceeding the pace in both Japan and the United States — had been this year’s most encouraging global economic story, and Germany had led that revival.

On balance at 09:00 GMT, the dollar was unchanged against the euro, the Swiss franc, the Australian dollar and the yuan. The greenback showed tiny 0.1% upticks versus the yen, peso, and loonie but had dropped 0.3% relative to sterling and 0.2% vis-a-vis the kiwi.

Share prices had fallen 0.6% in Japan, 0.5% in Italy and Greece, 0.4% in Taiwan and the U.K., and 0.3% in South Korea and Indonesia. Euroland’s newfound perceived political uncertainty helped lift share prices in neutral Switzerland by 0.6%.

The 10-year British gilt and Japanese JGB yields firmed two and one basis points, while the German bund remained steady at 0.36%.

Comex gold slipped 0.4%, while WTI oil was 0.1% firmer.

Today had figured to be a quiet day, with not much data of interest to be released.

German producer prices rose 0.3% on month in October, matching September’s lift, but on-year PPI inflation eased back 0.4 percentage points to a 2-month low of 2.7% with nearly identical 12-month increases in energy and all-nonenergy items.

Thailand reported faster-than-expected third-quarter GDP growth of 1.0% versus 2Q and 4.3% on year. GDP had risen from a year earlier by 3.3% and 3.8% in the first and second quarters of 2017.

Japan’s customs clearance trade surplus in October of JPY 285 billion was some 40% smaller than the October 2016 surplus, as an 18.9% jump in imports surpassed a 14.0% increase in exports. The seasonally adjusted surplus, however, continued to rise, printing at JPY 323 billion following JPY 267 billion in September, JPY 304 billion in August, JPY 316 billion in July and JPY 60 billion in June.

Food prices in New Zealand slipped 0.1% on month in October and decelerated to a 2.7% 12-month rate of increase. New Zealand’s service-sector purchasing managers index fell to a 6-month low of 55.6 last month from 55.9 in September and 58.8 last May.

South Korean producer prices were unchanged on month and 3.5% higher than a year earlier in October.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.


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