Morning Brew February 24 2025

Good morning,

The German Election is done and dusted – now the fun starts.

Firstly, the big losers of this election are Olaf Scholz, Christian Lindner, and Sarah Wagenknecht, while the winners are the CDU, Friedrich Merz, and the AFD.

After Lindner's FDP failed to enter parliament, the only realistic coalition that keeps the AFD out of power is CDU/CSU/SPD and Green. This makes the talks easy on the one hand, as there are simply no alternatives, but rather difficult on the other hand because there will need to be many compromises. Friedrich Merz plans to have the new government in power by Easter.

Donald Trump stated his happiness with the election but seems to have confused the CDU and the AFD.

What will be the key topics?

• First and foremost: European Security and NATO. With the US on its isolationist path, this is a key topic, if not the most important one. While Germany is usually not the first in line when European military alliances and re-armament are being discussed for historical reasons, as the strongest economy in Europe, Germany will need to play a major role here.
• Interestingly, Merz and Habeck seem to be aligned. Merz stated, "I would never have thought that I would have to say something like this in a TV show, but after Donald Trump's remarks last week... it is clear that this government does not care much about the fate of Europe." Habeck stated, "We are in a historically unique situation now. The Americans do not only leave Europe alone but work against Europe."
• Economy and Growth: How can Germany be driven out of its economic misery? Can there be an agreement on how to handle the key constitutional spending limit?
• Immigration: Can there be an agreement on how to manage immigration in Germany that increases public safety while maintaining the required inflow of qualified personnel?
• One of the key issues Germany is facing is unclear and overwhelming bureaucracy. Can the parties agree on deregulation?

  The initial market reaction is positive, with the DAX seen up 1.3% at 22,470 and EUR/USD up 0.5% at 1.0510.
  
  The easiest trade on the outcome should be defense but stocks like Rheinmetall have had a strong run already. Investor sentiment will be the key for the next few days and the willingness of the “Must Agree” coalition partners to compromise will be decisive – as the players especially int eh SPD are unclear, we will need to

   

  The last week ended on a sour note. Indexes suffered the worst day of the year and ended the week in the red by 1.6% for the S&P and 2.5% for the Dow and the Nasdaq. On Friday, the S&P and the Dow gave up 1.7% each, and the Nasdaq 2.2%. Volumes were high at 17 billion shares, and the VIX gained. The DAX fell to 22,200.

  Tesla and Nvidia lost more than 4%. Tesla announced a recall in the US, and Nvidia is showing nerves ahead of earnings.

  10-Year Yields fell to 4.43%. The USD index ended the week at 106.65. Ahead of the German Election, EU 10-year yields are 2% below the US ones.

  Gold and Silver ended the week on the backfoot but could recover to 2,940 and 32.65.

  In other news:

• On the third anniversary of the invasion of Ukraine, EU leaders visit Kiev, and in the UN, the general assembly is set to vote on opposing resolutions from Europe and the US.
• Berkshire Hathaway reported record profit & cash.
• Tensions in Gaza are rising over the treatment of Israeli hostages.
• Elon Musk asked US federal workers to report their activities last week or risk their jobs. He is also facing criticism for cutting positions that oversee his own companies. Was that his goal all along?
• The BBC reported the theft of USD 1.5 billion in cryptocurrency from Bybit.

The trigger for the nervousness was disappointing data on the one hand and increasing insecurity about the US government.

Key events this week are likely to be the earnings by Nvidia and the US PCE on Friday, but political events in the US and Germany are the elephant in the room.

• Monday: German Election outcome, German IFO EU Inflation
  Earnings: Zoom
• Tuesday DE GDP, US Consumer Confidence,
  Earnings:Home Depot, Dr Pepper, Scotiabenk, AMC, Lucid, Workday,
  
  
• Wednesday: AU CPI, Japan Leading Indicator
  Earnings Lowes. ANInbev, Nvidia, Snowflake, Saoesforce,
• Thursday: DE Unemployment, US Durable Goods, GDP,  Initial Jobless Claims,  Consumer Confidence,
  Earnings: Norwegian Cruiselines, TD Bank, Soundhound, Dell,
  
  
• Friday: Japan CPI, UK House prices, CH KOF, US PCE
  Earnings:Frontline,