The Bundestag election result is likely to be neutral for the markets. The Fed’s move to policy normal-ization indicates higher interest rates are coming. This will hit Tech stocks. A bigger spread between short and long rates means the maturity transform-ation business of banks will become more profitable.
No clear election winner
The German Federal election did not produce a clear winner. The SPD got the most votes with a 25.7% share, just ahead of the CDU/CSU with 24.1%.
Pleasing for the financial markets: the left (Die Linke) failed to clear the 5% hurdle
The Linke party was only able to garner 4.9% of the vote. Therefore, its representation in the Bundestag is restricted to direct mandates. Thus, the possibility of a governing coalition involving the far left is now highly unlikely and chances of significantly higher taxes, and residential real estate expropriations, are very much reduced. This is good news for the stock markets. For the SPD and the Greens the poor election result of the Linke party means a coalition of the left between these three parties would not have enough seats for a majority.
“Traffic light“ coalition: Red, Green & Yellow
The most likely scenario at present seems to be a coalition of the SPD, Bündnis 90 & the Greens and the FDP. As kingmaker, the FDP should provide some political realism and government expertise. The now reduced risk of tax increases could be traded in coalition negotiations against higher investments in climate protection.
“Jamaica“ coalition: Black, Yellow & Green
The second most likely scenario is a Jamaica coalition between the CDU/CSU, the FDP and the Greens. This is the constellation preferred by the FDP, but it is second choice for the Greens.
“Groko“, or Grosse Koalition, is rather unlikely
From today’s perspective, it is unlikely that a coalition of the two parties with the largest mandates, the SPD (25.7%) and the CDU/CSU (24.1%), will form the next government.
Traffic light coalition would have a decent majority
The traffic light coalition would have 416 seats out of 735, well above the 368 seats required for a majority. Thus, such a coalition should be viable even if there are some troublesome dissenters in the ranks.
CDU/CSU may have lost many voters to the AFD
Conservative groupings, specifically the right wing of the CDU/CSU, have lost votes to the AFD. It is therefore likely that the CDU/CSU will shift somewhat to the right in order to woo back those who have cast their votes elsewhere. If this reflects a conscious, strategic decision, a temporary role in opposition could be opportune.
The Bundestag election result won’t have a significant influence on the financial markets
No matter what the exact make-up of the next government, the presence within it of either the SDP or the Greens, will ensure that Europe‘s peripheral markets can continue to benefit from Germany’s creditworthiness. In this respect, the all-clear can also be given for the bond markets, at least in the short term. On the other hand, the result means chances are slim that bloated national budgets will be restructured in the foreseeable future. All in all, the Bundestag election result should be neither a boost nor a burden for the financial markets.
Higher yields on US government bonds weigh on stock markets
Profits in the future are worth less than profits today because they are discounted at the so-called risk-free interest rate. The interest rate on 10-year US government bonds is arguably the most important interest rate in the world. Due to the Fed’s announcement that it will consider reducing its bond-buying programs (tapering) in coming months and indications of a first interest rate hike in 2022 (followed by 3 more in both 2023 and 2024), the yield on US government bonds has risen noticeably. In the process, the slope of the yield curve has steepened.
Technology stocks and all stocks with high valuations will get punished
Technology stocks and all stocks that are highly priced in relation to near-term earnings are particularly vulnerable to rising interest rates and a steeper yield curve.
Finance companies, especially the banks, benefit
Banks lend long-term at the long-term interest rate and borrow their funds short-term at the short-term interest rate. The recent rise in long rates is thus very beneficial for maturity transformation, which remains the core business of many banks. This is why bank stocks have performed comparatively well since the Fed’s more “hawkish” communication.
Congress must raise Federal debt ceiling by Oct. 18
In early 2018, in late 2018, and in early 2019, Congress failed to raise the Federal debt ceiling in time. As a result, Federal government agencies had to suspend many of their operations. Right now, Republicans will not agree to raise the debt ceiling in protest against the $3500 billion spending package that the Biden Administration wants to implement. In order to raise the debt ceiling without Republican help, Democrats will have to rely on the votes of “moderates” and it is unclear whether they can succeed in convincing them to go along in time. One possibility is a small increase in the debt ceiling as a short-term measure in order to allow time for more meaningful negotiations. According to Fed Chair, Yellen, the debt ceiling must be raised no later than October 18. In our view, it is unthinkable that the Fed will start tapering until the debt ceiling has been raised sufficiently. There will be no default on US government bonds.
Fed announcements: a barking dog that doesn’t bite?
So far, the Fed has only announced that it would like to buy up bonds less aggressively if economic developments permit this. Concrete actions have been missing. One problem is that indicators are already showing a significant slowdown in the economy. Also problematic are the high levels of US indebtness and of net new borrowing. Old debt must be rolled over, and new debt must be placed with investors. In addition, the Biden Administration wants to implement its $3,500 billion spending package. Further complicating the monetary policy background are the very high prices in the equity, bond and real estate markets. These have the effect of making consumers feel wealthy, and thus supporting a good buying mood, despite high inflation.
It is likely that a sharp economic slowdown and falling stocks, bonds and house prices would force the Fed to stop its normalization policy. But it would probably take an “economic accident” or markedly weaker financial markets to stop the Fed from making a start on monetary policy tightening.
Contact: Thomas Härter, CIO, Investment Office
Telephone: +41 58 680 60 44
Disclaimer: Produced by Investment Center Aquila Ltd. Information and opinions contained in this document are gathered and derived from sources which we believe to be reliable. However, we can offer no under-taking, representation or guarantee, either expressly or implicitly, as to the reliability, completeness or correctness of these sources and the information pro-vided. All information is provided without any guarantees and without any explicit or tacit warranties. Information and opinions contained in this document are for information purposes only and shall not be construed as an offer, recommendation or solicitation to acquire or dispose of any investment instrument or to engage in any other trans action. Interested investors are strongly advised to consult with their Investment Adviser prior to taking any investment decision on the basis of this document in order to discuss and take into account their investment goals, financial situation, individual needs and constraints, risk profile and other information. We accept no liability for the accuracy, correctness and completeness of the information and opinions provided. To the extent permitted by law, we exclude all liability for direct, indirect or consequential damages, including loss of profit, arising from the published information.
In the latest Aquila Focus, Nicolas Peter, Head of Banking & Investments, discusses the continuing rally in US tech stocks and the lack of an interest rate cut in the USA for the time being.
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In 2023, numerous geopolitical risks came to the fore, supplemented by interest rate hikes by central banks in the fight against inflation. The conflict in Ukraine will soon last two years. In addition, the situation in the Middle East has worsened, particularly between Israel and Hamas. An escalation of the conflict to neighboring Arab countries has been prevented so far. Economic weaknesses are also evident in two of Switzerland's key trading partners: China and Germany. These developments are leading to a lack of important impetus from foreign trade. Geopolitical issues will continue to play an important role in the coming year. However, the past has shown that the impact of such events on the global financial markets is often short-lived.
Fewer sustainability investments, but more investments in pharmaceutical companies and the healthcare sector. Artificial intelligence en masse, but shares instead of gold. These are some of the resolutions of independent asset managers in Switzerland for the first quarter of 2024, according to the latest AVI Index.
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