Sentiment lifts as Conservatives win in Germany on a European unity message
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “A dose of more certainty has been injected into European politics, with the Germany’s Conservatives winning the elections. It comes at a crucial time for the continent. Three years on from the invasion of Ukraine, high stakes deal making between the US and Russia continues, Ukraine is out in the cold and the outcome will have huge implications for security in Europe. There is a dawning realisation that European nations will have to pull together and present a more united deterrent force, and Friedrich Merz, the CDU leader, is reading from that script. He has pledged to relax fiscal rules, to increase defence spending and inject the economy with much needed investment. But while Merz seems determined to ease off the so-called debt brake, which limits annual borrowing to 0.35% of GDP, it won’t be straightforward, because he will need a two-third majority in parliament. However, with Russia’s aggression set to stay an unrelenting black cloud, the recognition of the need to contribute more to NATO’s budget may see political factions pull together.
The hope that the Conservatives’ win might help pull Germany out of economic stupor and help bolster collective defence, has lifted investor spirits. The DAX is set for sharp gains and the euro is at four-week highs. Bond markets have also been relatively sanguine so far, with yields remaining relatively stable, although there will be keen eyes trained on the details of any spending shifts. It’s set to be a more muted start for the FTSE 100, with the stronger pound weighing on the earnings of multinationals, offsetting more optimism about European unity. Traders have reassessed bets on the number of interest rate cuts from the Bank of England, with only two more fully priced in by the end of the year.
Stubborn inflation continues to be a worry on both sides of the Atlantic, but stocks on Wall Street look set for a mini recovery after the losses of last week, prompted by falling consumer confidence and concerns about pressure on household budgets. The uncertainty of US trade policy and the knock-on effect on consumer prices is staying front of mind, and Friday’s release of the Personal Consumption Expenditures Index will be closely watched, given that it’s the Fed’s preferred measure of inflation. There are expectations the annual rate for January will ease off to 2.6% from 2.8%, but a stronger reading could see hopes for another interest rate cut in the summer fade.
A gauge of the strength of demand for AI chips will come on Wednesday as Nvidia releases its hotly anticipated results. Despite the emergence of large language models which are cheaper to run, other signs, including huge infrastructure investment plans from tech giants like Meta, indicate that Nvidia’s high-end chips will remain in demand. Investors are expecting another mega number in terms of revenue growth – which is expected to land at 72%. Enthusiasm is still super-hot for AI investments, but given Nvidia’s mega growth spurt, expect some volatility ahead if the results don’t meet expectations.
Oil prices have dipped back as supply concerns have eased off, helped by the resumption of exports from Kurdistan following a drone attack on facilities. Crude is also set to flow more freely from Iraq after the resolution of a dispute over the use of the Iraq-Turkey pipeline. As the grim anniversary of the outbreak of war in Ukraine is marked, the prospect of a deal to end the conflict is being assessed, given that it could see more Russian oil flowing onto world markets. But with negotiations set to be highly complex, any timing for a lifting of sanctions is still highly uncertain.’’