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

September 24, 2021

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

Sunday’s German election is a close call and stakes for Europe’s biggest economy couldn’t be higher. After 16 years of steady, centre-right leadership, Chancellor Angela Merkel will be stepping down.

Polls suggest the centre-left Social Democrats (SPD) will form a coalition with the Greens and the liberal FDP, dubbed the traffic light alliance because of the parties’ red, green and yellow colours.

But the number of undecided voters is at its highest in recent memory, so other outcomes are possible. The SPD’s Olaf Scholz is the voters’ choice to succeed Merkel, but coalition talks could take weeks, even months. Initial market reactions to the election outcome could prove premature.

-Reuters election graphic: https://tmsnrt.rs/2URCJH0

-German candidates clash in last TV debate before vote as SPD lead narrows

(Graphic: 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.

-Fed signals bond-buying taper coming ‘soon,’ rate hike next year

(Graphic: 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 next 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’s Evergrande problem today may dent global growth tomorrow

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

– ECB braces for sticky inflation; eyes end of emergency stimulus, sources say

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

-Economic policy stances of candidates to be Japan’s next PM

-Investors raise bets on Kono in Japan leadership race

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

(Reporting by Sujata Rao, Dhara Ranasinghe and Marc Jones in London; Lewis Krauskopf in New York and Kevin Buckland in Tokyo; Compiled by Sujata Rao; Editing by Hugh Lawson)