Merkel’s win will boost Euro
By Peter Rosenstreich
For the first time in a long while, European politics is likely to drive the Euro higher. The incoming German government, to be led once again by Chancellor Angela Merkel, is clearly pro-European, even though the right-wing AfD party and the left-wing Linke party captured significant parliamentary seats in yesterday’s national elections. The most likely coalition will be Merkel’s Union with the Liberal Democrats and the Greens. Even the Greens are supportive of stability bonds for the Euro, which would solve many of the uncertainties around European Union funding. Germany’s position, combined with the EU reform drive of France’s President Emmanuel Macron, give a positive backdrop to European investors. They responded by driving the Euro higher today against the CHF and the USD, after an initial, modest slide against both.
Of course there are risks: Macron’s falling popularity rating and the weakness of his party in upcoming Senate elections, Italian elections, Catalonia’s independence struggles and the difficulties of forming a German government. Still, in the near term, we are bullish on the Euro and would buy EUR/CHF on any pullbacks.
As for forming a government, Germany is on unprecedented ground, because of the historically weak electoral results of the two main parties, the Union (of Christian Democrats) and the Social Democrats. Nonetheless, Merkel has indicated that a coalition agreement should be reached by Christmas. Moreover, the AfD has already suffered a hard knock, as one of its founders and co-chairs, Frauke Petry, this morning announced she would not join the party’s caucus in the new parliament.
Time to buy gold
By Yann Quelenn
Asset prices are now more sensitive to central banks’ policies than to geopolitical risks. They are buying the story that the US Federal Reserve will shrink its balance sheet reduction and so driving a sell-off in gold. So, this is good time to reload gold positions.
Optimism about the Fed’s shrinkage is way too strong, especially in light of repeated disappointments in the past. Central banks must guarantee price stability, and this is extra difficult to combine with settling huge debts. It is going to be very difficult to put an end to the Quantitative Easing without provoking further turmoil on the market. Gold is definitely priced at a discount now.