Trouble at' mill for Angela Merkel - Socgen

Analysts at Societe Generale explained that the CDU and CSU will be comfortably the biggest party bloc in the Bundestag when the final count comes in after Germany's election, but Chancellor Merkel is going to have to conjure up a coalition with the FDP and the Greens, as well as facing the arrival in the Bundestag of the far-right AFD.

Key Quotes:

"If the election of President Macron suggested to anyone that populism isn't a threat to the EU, then today's vote is a wake-up call, even if in practise, despite the difficulty of forming a coalition government, relatively little may change.

We'll write (much) more about the implications for German and European politics when the final result is in. For now, the market reaction is to sell the euro, but only modestly. As I wrote last week, it's now or never for a EUR/USD correction.

The euro has done better than shifts in relative interest rates, short or long-term, nominal or real, can justify. EUR/USD 1.17 is a natural chart target and may well be tested in the weeks ahead.

A strong IFO would help the euro and the market has already embraced the idea both of a smooth start to the Fed's balance sheet normalisation, and a December Fed rate hike. But those are reasons to expect a modest euro pull-back, not to look for one to be avoided completely. EUR/SEK, EURNOK and EUR/PLN shorts, meanwhile, all of which we have written about in recent weeks, still appeal."