The NZ result isn’t much of a surprise and slippage may merely reflect the flip side of strength we saw on Friday plus something of a ‘risk-off’ start to the week after weekend N. Korea-related shenanigans (USD/JPY has also started the week weaker). Uncertainty over whether the new parliament will be a Nationals/NZ First affair could linger for weeks however, so ‘relief’ that the market’s least preferred option of a Labour-Green collation has been avoided isn’t likely to carry the NZD far for the time being.

The German result is more troubling for markets. Angela Merkel will still be chancellor and for a fourth term, but the BBC’s Berlin correspondent is describing  the result as disastrous for Mrs Merkel, who has been punished for opening Germany’s door to almost 900,000 undocumented refugees and migrants. The far-right AfD looks set to capture about 13% of the national voted and might end up as the strongest party in the state of Saxony.

In the scheme of things the German result has none of the connotations of the Brexit vote last year, or had Marine le Pen won this year’s French Presidential election. That said, the likelihood of a so-called ‘Jamaica coalition’ of CDU/CSU, Free Democrats and Greens (of which the latter two are ideologies apart), together with the representation for the AfD in parliament for the first time, brings the prospect of instability in German politics for the first time in a many years. We still nevertheless doubt its impact on the Euro and euro assets will be large relative to other (economic and monetary policy) influences.

Markets went out with more whimper than bang on Friday, US yields and the dollar a touch softer and US stocks ending flat.  There was no US economic data and central bank speak from Williams, Kaplan and George failed to move the dial much on December and 2018 Fed rate hike odds. Sterling fell away late in the day after Moody’s followed S&P and Fitch’s post-Brexit vote actions in lowering the sovereign rating another notch to AA2. All are now two notches below AAA. PM May’s earlier Florence speech on Brexit was long on (friendly) rhetoric and short on (financial) specifics.

DXY finished -0.1% and BBDXY -0.2% but these indices are still 0.3% and 0.5% higher on the week and so extending the previous week’s gains. EUR/USD ended +0.1% at 1.1951 (some earlier support came from strong EZ PMI data).  AUD ended +0.4% to 0.7962 and is 0.7950 now.  NZD was +0.31% to 0.733 and is 0.7300 now. CAD underperformed AUD and NZD after CPI and retail sales (ex-autos) both came out on the soft side of market consensus estimates.

In rates US Treasuries traced out narrow ranges, 10s -2.6bps at 2.251%. US stocks finished virtually unchanged while the VIX finished at 9.59 down from 9.67 and 10.17 the previous Friday, its lowest close since July 25th.  In commodities iron ore lost another $2.56 to $63.56.

Coming Up

Central bankers (and/or politicians) look more likely to be moving markets this week than anything on the global economic calendar.  On the latter, we’d probably highlight Eurozone September preliminary CPI and August US PCE deflator data, both on Friday and both relevant for gauging progress and otherwise towards the ECB and Fed achieving their respective inflation objectives. In Australia, the only data point to note will be Friday’s August RBA credit data. More important will be Friday’s Caixin China manufacturing PMI, commodity prices and risk sentiment.  Residual political uncertainty in Germany and New Zealand might have some influence, while US politics is important with the administration expected to unveil tax proposals this week (the suggestion is Wednesday) that may or not have the endorsement of all of the so-called ‘big-six’

In contrast to a sparse economic calendar, the week is replete with central bank speak. This includes Janet Yellen speaking on monetary policy on Tuesday, though hot on the heels of last week’s FOMC meeting and Yellen press conference, it’s doubtful we’ll learn much new. More interesting might be the subtleties of the positons of individual FOMC members towards a pre-year end rates rise (bearing in mind that 11 of the 16 current FOMC members placed their latest 2017 dot in the ‘once more this year’ bucket).  The list of FOMC speakers this week is too long to repeat here.

ECB speakers are also fairly thick on the ground. We’ll also hear from BoC Governor Stephen Poloz on Tuesday and RBA deputy Governor Guy Debelle on Thursday.  Today alone we’ll hear from the Fed’s Dudley, Evans and Kashkari and the ECB’ Draghi (before parliament) Mersch and Constancio. On Friday Constancio played down the influence of the euro in supressing Eurozone inflation.

In Japan, we might get an October general election announcement today from Prime Minister Abe upon his return from the United States. If so, and assuming he will be victorious, this is seen underscoring current policy commitments and at the margin playing yen negative. BoJ’s Kuroda addresses regional branch managers today.

Overnight

On global stock markets, the S&P 500 was +0.06%. Bond markets saw US 10-years -2.66bp to 2.25%. In commodities, Brent crude oil +0.76% to $56.86, gold+0.2% to $1,293, iron ore -3.8% to $63.56, steam coal -0.1% to $97.20, met. coal -0.1% to $204.50. AUD is at 0.795 and the range since Friday 5pm Sydney time is 0.7908 to 0.7986.

For full analysis, download the report:

• Markets Today: 25 September 2017 (PDF, 112kb)

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets

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