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German Political Uncertainty Fells Euro

Posted by Joseph Trevisani on Sep 25, 2017 5:23:09 PM

Updated 8:58 am EDT 9/26/17

Germany's Angela Merkel may have won her election but the euro faces potentially damaging uncertainly as the Chancellor negotiates a government from her party's weakest position in the Bundestag since 1949.

The euro fell as much as 1 percent against the dollar to 1.1831 (1.1848 4:51 pm EDT) from Friday's close after Merkel's Christian Democratic Union (CDU) garnered just 32.9 percent of the vote, a 8.6 percent decline from the last election.  The Social Democrats (SPD), her current coalition partner, saw their vote fall to 20.6 percent, their weakest result since 1933. Their leader Martin Schulz said his party had no choice to withdraw from the government and go into opposition. 

Ten-year bund yields sank five basis points to 0.40 percent, their lowest in more than a week. Two-year yields fell three basis points to -0.71 percent, their lowest since Sept 14th. The euro has now lost 2.5 percent versus the dollar (1.1788 8:54 am EDT, 9/26/17) since its more than two and a half year high of 1.2092 on Septembr 8th.

Ms Merkel urged the SPD to keep its options open.  “I heard the SPD’s words, nevertheless we should remain in contact,” she told a news conference. “I think all parties have a responsibility to ensure that there will be a stable government.”

The biggest surprise was the strong 12.6 percent third place showing of Alternative for Germany (AfD) the right-wing populist party formed in 2013. Its opposition to Merkel’s immigration policy of taking in more than one million economic and political refugees from the Middle East propelled it to become the first clearly rightist party in the German parliament in more than 50 years. In the federal elections in 2013 the party won 4.7 percent of the vote.

Merkel, only the third post-war chancellor to win four elections made it clear she still plans to serve a full term. But a coalition with the fourth ranking Free Democrats (FDP, 10.7 percent) and the sixth polling Greens (8.9 percent) will be difficult.

The FDP is a classically liberal and business friendly party opposed to deepening European integration led by Brussels. The Greens focus on ecological, climate and sustainability issues. Many of their policies envision stricter and more encompassing government regulations. A governing agreement that satisfies the demands of both parties would necessarily be vague, probably impractical and subject to inherent disagreements on a wide range of political topics.

The fifth ranking party, Der Linke (The Left, 9.2 percent) is a left-wing populist party, with many anti-capitalist tenets among its amalgamated groups.

Putting together a ruling agreement could take months and would test Merkel's leadership and negotiating skills.  The result would likely be even more politically unnatural and unstable than was the coalition with the Social Democrats.

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets

Charts: Thomson/Reuters

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