Markets Calm Amid Election Uncertainty

Coalition Talks Begin in Germany and New Zealand

US equity markets are on course to kick off the week slightly in the red, tracking similar moves across most of Europe and Asia overnight.

While the market impact has been negligible so far, the focus at the start of the week has been on politics after Germany and New Zealand went to the polls over the weekend and Japanese Prime Minister dissolved the lower house of parliament – effective 28 September – and called a snap election. The New Zealand election result has probably had the greatest impact, with the kiwi almost 1% lower against the greenback after neither of the main parties secured a majority, leaving the fate of the future government in the hands of the nationalist NZ First party.

The nationalists also performed strongly in Germany, where AfD become the first far right party to enter parliament since the second world war. While the EU will likely declare the result another victory for pro-EU parties, as it did after the French and Dutch election, the fact remains that nationalist parties are becoming increasingly popular and this result is another sign of this. The EU must work harder to reverse the trend if they want to avoid another exit in the years ahead.

Political Uncertainty Dominates Currency Moves

As it is, Angela Merkel’s CDU party will likely go into coalition with the FDP and Green parties, forming what has become known as the Jamaica coalition due to the respective party colours, with another grand coalition with the SPD apparently off the cards. The SPD performed even worse than expected and appeared to suffer as a result of the party’s last partnership with its rival. Still, investors appear confident that coalition talks will go smoothly, although they could take anything from a few weeks to a few months to complete, leaving a small element of uncertainty in the meantime.

Abe Calls Snap Election

As was already widely reported, Japanese Prime Minister Shinzo Abe on Monday dissolved the lower house of parliament and called a snap election, claiming he was looking to seek a mandate to proceed with strong diplomacy. The reality is that Abe is looking to capitalise on his strong performance in recent polls on the back of his stance over North Korea and apparent disarray within the opposition parties. Abe proposed a two trillion yen stimulus package alongside the announcement, a clear sweetener for the electorate ahead of the vote.

Brent Flies But Beware of the RSI

Still to come today we’ll hear from ECB President Mario Draghi, the Fed’s Charles Evans and Neel Kashkari and RBA Assistance Governor Michele Bullock.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

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