Wednesday, 25 September 2013

Merkel's Second Campaign Battle Begins

Ralph Shell, Excel Analyst

The victory celebrations after Angela Merkel's landslide victory in last weekend's election have just ended but now the speculation is beginning who is going to become part of her coalition needed to form a stable government. 

She fell five seats short of the seats needed to achieve an absolute majority in the Bundestag, and her former partner the FDP failed to receive the needed 5% threshold needed  for parliamentary representation.

It is expected that talks amongst the CDU party will go on through the rest of 2014, and what is not known, what other parties will want for the other five Bundestag votes?

Tuesday, we again received confirmation the economic recovery in the eurozone is lacking.  In Germany, the IFO Business Climate at 107.7 was a tick less than expected at 1.08, but up from 107.6 last month.  Other numbers were mixed.  Later this week we get  the German GfK Consumer Climate and the EU M3 Money Supply Reports.

But there are many more potential measurements of euro weakness.  Some were outlined in Market

"History suggests that European governments and the ECB will be tested.

First, the weakness of the real economy will increase financial pressure on European countries. During the second quarter of 2013, European economies recorded slow growth, technically ending the recession. However, the levels of economic activity excluding Germany and France remained low. The turnaround may prove fragile, given deteriorating conditions in emerging markets, which have been major buyers of European exports.

Ever-optimistic European governments and policy makers now proclaim a stabilization or lower rate of decline as an indication of the success of their policies. European forecasts of recovery may prove over-optimistic.

Second, banking sector problems will continue. European banks may have as much as 1 trillion euro in non-performing loans. Italian banks may have as much as euro 250 billion of these.

Increasingly, European governments are resorting to tricks to resolve problems of the banking system including inadequate stress tests, overly optimistic growth, and asset price forecasts and accounting stratagems. For example, Spain is seeking to convert euro 51 billion in deferred tax assets resulting from loan losses into core capital to meet minimum requirements. If successful then these would represent around 30% of Spanish bank core capital.

Without urgent and resolute action, bad debts and weak capital positions will create zombie banks, unable or unwilling to supply credit to the economy restricting any recovery.

Third, crucial structural reform of labor markets and entitlements will be slow, reflecting weak economic activity and also the unpopularity of many measures. In addition, the relative stability of the last twelve months has lulled governments into a false sense of security, reducing the urgency of pursuing economic restructuring.

Fourth, political tensions, both national and within the euro zone, are likely to increase."

The list goes on, but do the German politicians have the time to leisurely dawdle when so many other countries have urgent problems in need of attention?  And if the needs of other countries are not going to be addressed, how will this keep the needs of the single currency unified?  How often is a postponed solution a better one?

 Click to Enlarge EURUSD Daily Forex Chart

Since the day when Bernanke decided the economic news from his perspective was not that hot and there would be no taper for another month or so, the market has stalled at the 1.35 handle.

Click to Enlarge EURUSD Weekly Forex Chart

We are inclined to think the market is headed for a retracement back to the 1.33 handle, though bad euro zone news could take it lower.

As always, manage your money.
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