Please click here to read this week’s Weekly Digest, with commentary on recent political developments.
Once again, market headlines are dominated by political developments today, and the range is global. On the election front there was an underwhelming victory for Angela Merkel’s Christian Democrats, while the far right Alternative fur Deutschland did better than expected. Meanwhile Japan’s Prime Minister, Shinzo Abe, has called a snap election for October, possibly a dangerous tactic in the light of Mrs May’s experience in the UK. The war of words between the US and North Korea hit new depths of playground name-calling over the weekend. Closer to home, the Labour Party Conference starts today with Brexit having been airbrushed from the agenda, and all this following Moody’s downgrade of the UK’s sovereign debt rating late on Friday.
Bar the noisy headlines, does it mean a lot for financial markets? No doubt the AfD’s (Alternative for Germany) 13% share of the vote is a nasty shock for Mrs Merkel, as was the loss of votes for her own party, but she will remain Chancellor. The rise of the AfD has been well documented in response to the immigration crisis, and had already nudged the CDU’s (Christian Democratic Union) policies to the right. The expectation is that Mrs Merkel will seal a coalition with the Free Democrats and the Green Party. The FDP (Free Democratic Party) is less pro-Europe and the Greens less pro-business, but the imperative will be to keep the AfD at bay. There seems no reason to expect that this will derail the ongoing recovery in the economy, which was underscored by strong Purchasing Managers Index survey data on Friday.
The UK bond market has all but ignored the Moody’s downgrade, with the yield on the 10-year UK government bond at 1.36%, barely changed from Friday’s close. Our bond team deems that to be a suitably phlegmatic reaction, bearing in mind that the UK is far from alone in not holding a top-notch credit rating. Ironically, the downgrade came a day after the UK reported a better-than-expected monthly public debt position, and also on the day that Theresa May delivered her big speech on Brexit in Florence.
Looking ahead to the week, we have trading updates from the flagged names Nike tomorrow and Halma on Wednesday, but very little in the way of key economic data and no scheduled central bank meetings.