Earlier today, we said that as more sellside commentary on today's startling German election result came out, the knives would be out for the Euro. Sure enough, that's precisely what happened, and nobody captures the sour mood better than SocGen's FX strategist Kit Juckes who writes that "if the election of President Macron suggested to anyone that populism isn't a threat to EU, then today's vote is a wake-up call."
Selected excerpts from his note "European Trouble"
The CDU and CSU will be comfortably the biggest party bloc in the Bundestag when the final count comes in after Germany's election, but Chancellor Merkel is going to have to conjure up a collation with the FDP and the Greens, as well as facing the arrival in the Bundestag of the far-right AFD. If the election of President Macron suggested to anyone that populism isn't a threat to EU, then today's vote is a wake-up call, even if in practise, despite the difficulty of forming a coalition government, relatively little may change.
We'll write (much) more about the implications for German and European politics when the final result is in. For now, the market reaction is to sell the euro, but only modestly. As I wrote last week, it's now or never for a EUR/USD correction. The euro has done better than shifts in relative interest rates, short or long-term, nominal or real, can justify. EUR/USD 1.17 is a natural chart target and may well be tested in the weeks ahead. A strong IFO would help the euro and the market has already embraced the idea both of a smooth start to the Fed's balance sheet normalisation, and a December Fed rate hike. But those are reasons to expect a modest euro pull-back, not to look for one to be avoided completely. EUR/SEK, EURNOK and EUR/PLN shorts, meanwhile, all of which we have written about in recent weeks, still appeal.
That said, there isn't an awful lot to get me too excited about the dollar here. US TIPS yields have moved yup, but drifted back down on Friday, and are back below 40bp. Then recent pattern of real yield moves is down in Japan (stay long USD/JPY and CAD/JPY)., up a bit in the US and Germany (meh!), flat after the recent rise in the UK (trouble brewing for sterling) and supportive of both CAD and AUD.
Meanwhile, as SocGen expect storm clouds for the Euro, here is Goldman doing what it does best, "explaining" how yet one more material and key development will have no impact or significance whatsoever.
Exit polls reported by the German media show the victory for the Christian Democrats (CDU/CSU) party of Angela Merkel arriving in the first position with a 13pp lead over the Social Democrats (SPD) party. In line with expectations, only two possible coalitions – benefiting from a large parliamentary majority – can be envisaged: either (a) a continuation of the current 'Grand coalition' with the Social Democrats (SPD); or (b) a 'Jamaica coalition' in collaboration with the Liberal Party (FDP) and the Green Party (Die Grüne).
We do not expect these electoral results to have a significant impact on markets from tomorrow as the victory of Ms. Merkel was largely anticipated and time is required to form a new government.
Actually, that's dead wrong, but what difference does it make at this point. We look forward to finding out which of these two explanations will be proven right in the coming days.