Euro stumbles, bond spreads widen after German election

Euro stumbles, bond spreads widen after German election

The euro has taken a mild knock, while the gap in yields between German government bonds and those of traditionally wobblier euro states has widened in the wake of the German election, with investors chewing over the rise of right-wing populists, and the chance of even greater fiscal austerity.

While the yield on Germany’s benchmark 10-year Bund is flat at 0.44 per cent, yields on the edge of the shared-currency area, where economic performance is less robust and government spending is looser, are rising as investors sell the debt.

The move comes amid concern that the new politics in Germany will make eurozone’s main economic power more likely to take a tougher line on fiscal discipline in the currency area.

The likely presence of the Liberal Free Democrats (FDP) in the new coalition makes such an approach more likely Italy’s 10-year yield is up 2.7 basis points (0.027 percentage points) at 2.186 per cent, taking it back toward the 2.203 per cent high point reached on Thursday, a two-month peak. Spain’s 10-year yield is up 1.7 basis points to 1.641 per cent, which is a two-month peak. Portugal’s 10-year yield is up 2.6 basis points at 2.45 per cent.

As Kit Juckes at SocGen puts it: We suspect that Germany’s EU policies will be more cautious and restrictive, irrespective of which coalition takes office.

He adds: It’s now or never for a euro-correction and the euro is likely to fall against the Swedish krona, Norwegian krone and Polish zloty. Overnight moves, it must be said, are tiny. (It’s now down by 0.35 per cent to $1.1910.)

Taking the other side of that view is Ulrich Leuchtmann at Commerzbank: The euro’s relatively robust reaction to the election result is likely to reassure all those who had feared notable euro weakness in case of the FDP being included in the government. I therefore do not consider it to be totally unlikely that the euro will be able to climb to levels above $1.1950 today.

And Mark Haefele, chief investment officer at UBS: The presence of the FDP in the coalition has the potential to dilute Merkel’s desire for a close alliance with French President Emmanuel Macron to promote closer European integration.

The FDP does not support fiscal aid for more indebted nations on Europe’s periphery.

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