Take Five: “Auf Wiedersehen Merkel, hallo…?”

(C) Reuters. Workers remove an advertisement showing German Chancellor Angela Merkel with a slogan that reads “Mother of Nation – Thanks For 16 Years of Hard Work” before the upcoming state elections in Hamburg, Germany September 24, 2021. REUTERS/Fabian Bimmer

LONDON (Reuters) – Following are five big themes likely to dominate thinking of investors and traders in the coming week and the Reuters stories related to them.

1/GERMANY’S ‘MUTTI’ BOWS OUT

Germany’s Social Democrats are set to start the process of trying to form a government after they narrowly won their first national election on Sunday since 2005 to end 16 years of conservative-led rule under Angela Merkel.

The centre-left Social Democrats (SPD) won 25.7% of the vote, ahead of 24.1% for Merkel’s CDU/CSU conservative bloc, according to provisional results. The Greens came in at 14.8% and the liberal Free Democrats were on 11.5%.

The SPD is likely to seek a coalition with the Greens and the liberal FDP, dubbed the traffic light alliance because of the parties’ red, green and yellow colours.

While coalition talks could take weeks, even months, early signs that a more leftist coalition is unlikely could be relief for German bonds.

German election eyes finishing line https://fingfx.thomsonreuters.com/gfx/mkt/zgpombjywpd/germany2209.PNG

2/DATA DIVE

The Federal Reserve has cut its 2021 U.S. growth forecasts and projects a 5.9% rate, versus 7% previously. Upcoming data will show if the coronavirus continues to undermine the recovery.

Consumer confidence in September is on tap, after August readings came in well short of estimates, dropping to a six-month low.

Markets will get a fresh view on the housing market in the form of data on home prices and home sales, while the personal consumption expenditures (PCE) index will offer a glimpse of inflation. A Reuters poll forecasts a 3.7% annual rise in the Fed’s favourite inflation gauge, a touch above 3.6% in July.

US consumer confidence https://fingfx.thomsonreuters.com/gfx/mkt/zdpxodawbvx/Pasted%20image%201632325697106.png

3/CAUTION! FRAGILE CHINA

The woes of debt-saddled Chinese developer Evergrande are gnawing at global markets. Unsurprising because the property sector has a bearing, direct or indirect, on a quarter of the country’s huge economy.

The developer has more payment deadlines this week, but the bigger picture, the sheer size of the Chinese economy, implies the risk is high of a global growth hit — commodity prices, emerging market currencies and even European elevator-makers have all felt the heat.

BIS data shows Chinese banks had around $1.6 trillion of cross-border liabilities as of early 2021. Given their exposure to real estate, through mortgage loans and lending to property companies, any implosion could send ripples worldwide.

China property comes crashing down https://fingfx.thomsonreuters.com/gfx/mkt/zdpxodjoxvx/Pasted%20image%201632467792327.png

4/HIGH HICP

The ECB reportedly expects inflation to hit 2% by 2025. Despite analysts’ scepticism, surging power prices and the seep-through elsewhere, including into inflation expectations, could mean it may not be too far off that mark.

In that light, advance readings of German and euro zone HICP — the harmonised index of consumer prices used by the ECB — due Thursday and Friday respectively — are of interest. German HICP hit a 13-year high of 3.4% in August, while consumer inflation at 3.9% was the highest since 1993.

Euro area consumer inflation expectations have doubled this year, surveys suggest, while bloc-wide HICP hit 3% in August, the highest since 2012. Power price rises have already impacted headline readings and September may show another increase.

Euro area inflation https://fingfx.thomsonreuters.com/gfx/mkt/akpezqnlzvr/Pasted%20image%201632327337731.png

5/PICKING A PREMIER

Japan’s ruling party votes for its new leader on Wednesday, with the victor set to be the next prime minister. And it’s a tight race.

Of the four candidates, vaccine minister Taro Kono is the ostensible frontrunner, while former foreign minister Fumio Kishida is the challenger. Sanae Takaichi and Seiko Noda, also former ministers, are each vying to be the first woman in the top job but are considered long shots.

Kono is favoured by the Liberal Democratic Party’s rank-and-file, but his reputation as a maverick makes party veterans wary. Kishida is more traditional, but is hobbled by a bland image.

Should Kono not win an outright majority, the top two will contest a run-off, where Kishida is expected to have an edge.

Investors seem to be betting on Kono. Renewable energy and office tech shares that could benefit from his policies have outperformed shares in medical services, where Kishida advocates higher spending.

Japan election bets https://fingfx.thomsonreuters.com/gfx/mkt/zdvxodkjapx/Pasted%20image%201632408971742.png

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