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Daily Briefing: Merkel ahead on the final lap
September 18, 2017 / 7:25 AM / in a month

Daily Briefing: Merkel ahead on the final lap

German Chancellor Angela Merkel leaves a news conference with children at the Christian Democratic Union party (CDU) party election campaign meeting centre in Berlin, Germany, September 17, 2017. REUTERS/Fabrizio Bensch

LONDON (Reuters) - With under a week of campaigning to go before next Sunday's election, Angela Merkel and her CDU conservatives have consolidated a comfortable 14 percent lead over the rival centre-left SPD.

The main risk to a Merkel victory now is a shock rejection by the substantial number of Germans still telling pollsters they have not made their minds up. If that doesn’t happen, most of the suspense surrounds who her party will pick as partner, with options including another grand coalition with the SPD or a fresh tie-up with the FDP, newly re-invented as a eurosceptic force with a hard line on migrants.

The latter has ruled out joining a coalition with Merkel if she supports French plans to set up a joint euro zone budget (something Merkel is in any case wary of) and also said it would expect to occupy the powerful finance minister post in any government. The main obstacle to that goal comes in the form of the current incumbent, CDU veteran Wolfgang Schaeuble: as his party throws a gala reception tonight to mark his 75th birthday, he has made it clear he would relish another term.

Bank of England Governor Mark Carney delivers a high-profile speech at the IMF in Washington. He has already declared himself to be part of the majority of BoE policymakers who now think the balance of its risks is shifting more towards high inflation and away from a Brexit slowdown in economic growth. Will he give investors a fresh steer on how likely a rate hike is at the Bank of England’s next meeting in November?

The French finance and budget ministers are expected today to give the main economic forecasts underpinning the upcoming 2018 budget, Emmanuel Macron's first as president. He is promising to cut state spending by 10 billion euros next year and already has run into controversy over a proposed reduction to housing support. To soften the blow from that, the government announced over the weekend it would ask housing associations to cut rents for social housing.

MARKETS

As world equity markets clock up new record highs first thing Monday, with MSCI’s world index hitting it highest level in its near 30-year history, attention is shifting to see how world central banks will respond.

The Bank of England’s surprise signalling last week of a likely UK interest rate rise in the coming months has upped the ante somewhat and lifted sterling. Governor Mark Carney speaks later on Monday in Washington. But the week’s main set-piece event will be the Federal Reserve’s latest policy decision and press conference on Wednesday and details of how it will start winding down its gigantic balance sheet are expected to be revealed. Ten-year Treasury yields nudged higher about 2.2150 percent first thing.

The Bank of Japan also meets this week, although its unlikely to move policy settings for now – not least as Prime Minister Abe is reported to be considering a snap election there next month.

The Bank for International Settlements quarterly report this weekend showed the world’s main central banking forum puzzling over the persistently subdued global inflation that’s preventing central banks from normalizing policy settings more rapidly even as underlying economies pick up pace. But it warned that the delay risks creating a ‘debt trap’, where affordability measures were being flattered by super-low interest rates and only encouraging more borrowing that may not be serviced easily when rates do return closer to normal.

The stock market mood was upbeat across the world on Monday nonetheless, with Wall St’s record highs on Friday seeing the Vix volatility index fall back to 10 percent for the first time in almost 6 weeks. Asia bourses have followed through, with Shanghai and HK up smartly and Tokyo’s Nikkei up about 0.5 percent  as the yen retreated to its weakest levels against the dollar since July. Sterling continued to push higher against the dollar too, extending its stellar move last week to its highest since the Brexit referendum last year.

Brent crude was firm above $55.60. European stocks are expected to open about half a percent higher. In debt markets, Portuguese bonds were an early mover after Standard & Poor's upgraded the country’s sovereign credit rating to investment grade late on Friday. The gap between 10-year Portuguese bond yields and German equivalents fell to its lowest since January 2016, at just 228 basis points.

Editing by Toby Chopra

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