There were numerous notable political developments last week.
The General Election in Germany resulted in Angela Merkel’s Christian Democratic Union / Christian Social Union Party winning the biggest share of the vote, as expected. However, her share of the vote fell by 8% to 33%. Her previous coalition partner in government, the Social Democratic Party, finished second. Its share of the vote also dropped and it announced that it intends to serve in opposition. The likelihood is that Angela Merkel will remain Chancellor, but she will be holding coalition negotiations with a couple of the smaller parties and her authority will be diminished. The right-wing Eurosceptic party, Alternative für Deutschland, was the biggest improver, winning 13% of the vote and entering parliament for the first time.
Prime Minister Theresa May gave a speech about Brexit in Florence. This largely repeated the aims of the speech she gave at Lancaster House in January. She said that the UK would like a two-year transition period after March 2019 to avoid a “cliff edge” Brexit. There was no number given indicating the size of the financial settlement the UK will be prepared to pay. However, the tone was slightly conciliatory and it is clear that negotiations are going on behind the scenes regarding a cash payment for market access. Whether agreement can be reached and a hard Brexit avoided remains to be seen.
In the US, Donald Trump unveiled his long-awaited tax reform plans. Amongst other things, these aim to simplify and reduce income tax rates, abolish inheritance tax, reduce corporation tax and encourage companies to repatriate earnings made by overseas subsidiaries. These changes would significantly increase the budget deficit, unless they boost economic growth (as hoped) or are accompanied by cuts to spending. With many Republicans anti-deficit, and many Democrats pro-spending, getting the reforms through Congress will not be easy.
There was also a General Election in New Zealand. The National Party, led by current Prime Minister Bill English, won the most seats but does not have a majority in parliament. The Labour Party finished second but increased its share of the vote considerably. The balance of power is held by the NZ First Party, which has at different times been in coalition with both the National and Labour Parties. The coalition negotiations will be interesting. We are clearly in an era of divided electorates.
There was not a great deal of activity in financial markets. The Pound was slightly stronger against the Euro and weaker against the US Dollar. Stock markets were slightly higher and government bond markets were a little weaker. There were no particular surprises in the economic data released which moved markets, although it is notable that the oil price has been continuing its three month trend higher and Brent Crude Oil tested $60 during the week.