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Germany Goes to the Polls

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On Sunday, Germany will vote and determine the composition of the lower house of parliament, which will then elect the successor of Ms Merkel as Chancellor. First results can be expected shortly after 6pm CET. The Social Democrats (SPD) remain the frontrunner. However, they will need at least one partner to form a government – negotiations for which will be difficult and may take a few months. Still, we attach a 75% probability that the SPD will be heading the coming government. We therefore see a high likelihood of a continuation of current centrist policies, even if higher minimum wages and some form of rent control would probably be on the table. We would expect major policy shifts only if “The Left” were to be included in the coming governing coalition. While German elections have had a rather limited impact on equities over the past 50 years, we believe the real estate and the utility sectors are the most likely to be affected by the election results and coming policies. Also, inflation has become a topic in the election campaign, hence, we explain why the ECB is not targeting 0% inflation – which also the Bundesbank never did.
On a separate note, we also comment on the Fed that has delivered a more hawkish dot plot this week. It now shows close to two additional rate hikes by the end of 2023, in part reflecting higher than previously expected inflation rates. This should lead to higher bond yields, led by real yields in Q4, with intermediate maturities likely underperforming. While
Jay Powell has managed to convey the hawkish message of the Fed in a rather benign way, it is now almost certain that tapering is going to be announced at the next meeting in November.

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