Euro Whipsaws Following Breakdown of German Coalition

New elections have so far been ruled out in Germany following the collapse of coalition talks on Sunday, which for one thing has dashed hopes for pending fiscal stimulus. The breakdown of the negotiation was a surprise, especially as it was caused by the FDP party walking away, which is Merkel’s preferred coalition partner. Immigration policy was sticking point, with fundamental differences emerging with the Green party. A key ally of Merkel, Jens Spahn, who is a members of Merkel’s CDU party, said that “there is no grounds for panic” while suggesting that some SPD members, which is the current partner of the CDU, are open to linking back up with the CDU to form a new coalition, even though the party had ruled out a repeat alliance.

The euro whipsawed first moving lower on the heels of the news that talks to form a coalition government in Germany had collapsed. The currency pair snapped back subsequently and is back to hovering near the 50-day moving average. European equities are mostly higher on the session, while Asian shares were mixed with the Nikkei underperforming closing down 0.6%.

German PPI Contracted in October from September

German PPI producer price inflation fell back to 2.7% year over year in October, from 3.1% year over year in the previous month. Pretty much as expected and with the deceleration to a large extent due to lower energy prices, which rose 2.8% year over year in October, after jumping 4.9% year over year in September. Heating oil price increases moderated and dropped back to 5.7% year over year, after spiking to a whopping 18.9% year over year in the previous month. Food price inflation also decelerated, but remains at relatively high levels. While the headline rate came down, the numbers also confirm that underlying inflation pressures are slowly picking up, with energy and food prices not the only contributors to a headline rate that is clearly above the ECB’s 2% mark. Indeed, PPI excluding energy accelerated to 2.7% year over year from 2.6% year over year in the previous month.

An exodus from U.S. high yield debt this past week including mutual funds and ETFs totaled some $4.43 billion according to Bank of America, the third largest drop on record and the biggest decline since August of 2014. The tax status of junk bonds in the pending tax reform legislation remains an open question, while short-dated market yields have continued to rise to trend highs as the Fed slowly removes the punch bowl, in addition to valuation concerns. This has led to some divergence in junk bond returns in November that only recently appeared to be noticed by stock investors.