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German General Elections Loom

Jack Turner, Research Analyst

This week we look at the pending German federal elections, investors’ reaction to the situation in North Korea and provide an update on some important economic data coming out in the Eurozone, UK and US.

GERMAN GENERAL ELECTIONS LOOM

The TV debate between the two leading election candidates, Angela Merkel (Christian Democratic Union/CDU) and Martin Schulz (Social Democratic Party/SPD), took place with Merkel seen as the winner. Schulz needed to do better and could lose his political chair if the SDP’s votes are lower than its 2013 count. Instead the focus is on who could form a collation. It could be between the CDU, the Free Democrats Party (FDP) and the Greens. However, the main policy points espoused by Merkel and Shultz are remarkably similar and so the CDU and the SPD could unite. The far right party, Alternative für Deutschland (AfD) are on track with 8% of the vote to get over the 5% threshold required and take up seats in Parliament.


NEWS
WILL UK INTEREST RATES RISE?

Economists remain divided about the Bank of England's potential action given inflation remains above its 2% target at 2.6%. Last week one of the Bank’s decision makers drew attention to inflation, while August’s good news in the Markit/ CIPS UK Manufacturing Purchasing Managers’ Index (PMI) that saw the index rise to 56.9 from 55.3 in July led to more chatter around a rate rise. However, there was also detracting news: manufacturing remains at just 10% of the UK economy; the construction PMI numbers came in at 51.1, very close to the 50 neutral number; and Parliament is due to start the fractious debate about the legislation needed to pass current EU legislation onto the UK statute books.

EU INFLATION UP
Eurostat’s latest numbers are in for the Eurozone’s inflation and they increased by more than was expected to 1.5% versus July’s 1.3%. The region’s target is slightly below 2%, but energy rose by 4% and food, drink and tobacco increased by 2%. The statistics’ office also published data showing unemployment was unchanged at 9.1%. These two combined could put pressure on the European Central Bank to raise interest rates at its policy meeting later this week. However, there is a more mixed picture when you dig into the numbers and the core inflation rate has remained unchanged at 1.2%.

US EMPLOYMENT BELOW GROWTH TARGET
US non-farm payrolls rose by 156,000 in August, below expectations and the level of the previous month. June and July’s data was also revised downwards: the US Department of Labornow estimates that 210,000 jobs were created versus the 231,000 jobs originally stated in June; July saw 189,000 jobs launched instead of 209,000 jobs. The data was collected however before Hurricane Harvey landed and economists expect the data to take a hit due to the storm damage. Hurricane Katrina led to 100,000 becoming unemployed. The Houston area has five times the population of New Orleans.


PORTFOLIO ACTIONS
There was a marked flight among investors to Gold last week as a result of North Korea firing a missile across northern Japan that led many to take stock of their portfolios. As a response to the risk stakes being raised, the ultimate ‘safe haven’ asset rose by 2.5% in value, and over the month of August has climbed 4%. 7IM holds between 6% and 8% across our portfolios.

Sunday’s nuclear test by North Korea is also not likely to allay concerns among investors that the tensions will not escalate further. The way forward depends on China’s tough choice between a North Korea with nuclear capabilities or closing down its neighbour’s economy which could lead to political chaos and mass suffering. Any breakdown of the North Korean state could also leave China with a border that sees US troops lining up alongside South Korean allies.


THREE ANNOUNCEMENTS DUE THIS WEEK
6 Sep –US Balance of Trade // 7 Sep –Eurozone Interest Rate Decision // 8 Sep –UK Balance of Trade

* AfD=8%; ^ Others=4%

SOURCES: ZDF, BLOOMBERG, REUTERS, 7IM

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