This weekend saw elections in Germany and New Zealand whereby the incumbents both claimed victory but failed to secure a majority

This subsequently hampered NZD and to a lesser extent EUR with both main parties now eyeing coalition talks

Looking ahead, highlights include German IFO, and a slew of central bank speakers

ASIA

Asia equity markets began the week subdued as FX took much of the focus amid post-election hangovers from New Zealand and Germany where the incumbents in both won most votes but failed to get majorities, which moves the process on to coalition negotiations. ASX 200 (+0.1%) and Nikkei 225 (+0.4%) were positive with the latter the outperformer on JPY weakness, while a 4-month high Japanese Nikkei Manufacturing PMI and reports that PM Abe is considering a JPY 2tln economic package added to upbeat tone. Chinese markets were subdued with Shanghai Comp. (-0.4%) and Hang Seng (-1.1%) negative, as property names suffered from tighter restriction announcements, although the losses in the mainland were stemmed following a firm liquidity operation heading into next week’s National Day holidays. 10yr JGBs were relatively flat as pressure in the safe-haven from a positive risk sentiment in Japan, was counterbalanced by the BoJ’s presence in the market for a respectable amount just shy of JPY1trl in JGBs with 1yr-10yr maturities.

New Zealand held its general election on Saturday which resulted to a hung parliament, as no party gained the 61 seats needed for a majority. In terms of the projected results, the incumbent National Party won 58 seats, main opposition Labour Party won 45 seats, New Zealand First won 9 seats, Green Party won 7 seats, ACT won 1 seat and the Maori Party won 0 seats. (Newswires

PBoC injected CNY 160bln via 14-day reverse repos and CNY 40bln via 28-day reverse repos.

PBoC set CNY mid-point at 6.5945 (Prev. 6.5861).

EUROPE/UK

German election results showed German Chancellor Merkel is set for a 4th term after her CDU/CSU won the most votes, but performed weaker than expected and will need to undertake coalition discussions. In terms of the number of seats, CDU/CSU won 246 seats, SPD won 153 seats, AfD won 94 seats, FDP won 80 seats, Die Linke won 69 seats and Grune won 67 seats. (Newswires/Twitter) Given the poor performance of the SPD (worst performance since WW2), the party have refused to enter into a Grand Coalition and instead will form the opposition (to avoid AfD becoming the opposition. As such, Merkel will now have to try and form a ‘Jamaica’ Coalition with the FDP and Green parties. However, the FDP initially distanced themselves from forming such an alliance.

Moody’s downgraded UK sovereign rating to Aa2; Outlook Stable from Aa1; Outlook Negative. (Newswires)

FX

Election results were the main catalysts for FX, in which EUR/USD was pressured and tested the 1.1900 level to the downside after the German election results (detailed above). Elsewhere, NZD/USD also suffered from political uncertainty after New Zealand’s incumbent National Party won most seats but failed to secure a majority as anticipated. This places the next government at the hands of New Zealand First Party’s leader and effective ‘kingmaker’ Winston Peters, who is all too familiar with this obligation having supported both the National Party and main opposition Labour in past governments.

COMMODITIES

Commodities were mostly range-bound which kept WTI subdued, while copper was unchanged amid a subdued risk tone. Elsewhere, gold (-0.3%) was pressured from early trade due to a firmer greenback, after the currency benefitted from political uncertainty weighing on a couple of its major counterparts post-elections.

Iraq are to increase their oil capacity to 5mln bpd whilst stating that they remain committed to output cuts. (Newswires)

GEOPOLITICAL

North Korea’s Foreign Minister stated that President Trump's labelling of Kim Jong Un as ‘Rocketman’ has made North Korean rockets’ visit to entire US mainland inevitable, while there were also separate reports that US Air Force B-1B Lancer Bombers flew over the waters east of North Korea on Saturday. (Newswires)

North Korea reportedly sent an open letter to foreign countries to fulfil their duty in realizing international justice and peace against Trump tspaneat. (KCNA)

US

Treasuries were marginally higher amid the cautious tone with the 10y yield up just shy of 2bps. IFR noted that it was an “illiquid Friday market”, maybe exacerbated by the Jewish New Year and ahead of key risk events over the weekend and next week, including: New Zealand and German elections (weekend), Fed’s Yellen (Tuesday) and the expected announcement of Trump’s tax plans at some point during the week.

Fed's Kaplan (Voter, Soft-Hawk) said he is open-minded on another rate hike in 2017 and that he has not made a decision yet. Kaplan added that the neutral rate may be as low as 2.25%. (Newswires)

Republican tax negotiators are eyeing a 20% tax rate, according to sources. N.b. this would be higher than desired by President Trump. (Newswires) US President Trump stated that tax plan was totally finalized. (Fox News)

US issued proclamation banning travel to the US for citizens from North Korea, Venezuela, Iran, Chad, Syria, Libya, Somalia and Yemen. (Newswires)

US Senators Graham and Cassidy are said to have revised the Obamacare repeal bill after reports which suggested several senators opposed an earlier Obamacare repeal plan drafted by Sens. Bill Cassidy and Lindsey Graham. (Newswires)