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Ending the bull run
by Tony Butcher
Issue 8
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The results are in from the German Elections but it may be some time before any formal government is announced. The cynical tactics resorted to by Gerhard Schröder, in order to bring about the earlier than expected polls, have left him facing the political exit.

At some points during the campaign, he had been facing a heavy defeat to the Christian Democrat Party (CDP) headed by Angela Merkel, Germany’s own ‘Iron Lady’. Now with most of the regional results announced, it seems the Iron Lady has squandered the comfortable lead and the CDP are looking for a slim majority and working out which coalition Government would be acceptable.

Even the possibility of a Grand Coalition Government between the CDP and Gerhard Schröder’s Social Democratic Party (SPD) has been discussed. However, it seems they are unable to decide on who should be Chancellor. Germany, the largest economy in Europe, has been suffering from lacklustre growth and escalating unemployment in recent years.

Many commentators had been hoping the elections would bring about the change required for economic reform and a catalyst for economic growth in the last quarter of the year and into 2006. It looks like a period of political and economic stagnation could ensue, as uncertainty spreads across the markets.

The reaction from the German Stock Market (DAX) the morning after was to fall 2.2% in early trade, this did recover slightly before the close, but the possibility of months of uncertainty could spell an end to the impressive bull run that the markets have enjoyed since the elections were called.

Another likely consequence could be the weakening of the Euro. The US Dollar strengthened against the European currency in the immediate reaction and this trend could continue as the situation drags on without a viable solution in sight. Jean-Claude Trichet, head of the European Central Bank (ECB), remains adamant that current interest rates are appropriate and he believes structural reforms are required from the member states in an effort to maximise European growth.

Germany had headed a group of countries putting pressure on the ECB to cut interest rates as a simple solution to their floundering economic growth, but there are no such thoughts of interest rate cuts across the Atlantic in the United States. Federal Reserve Chairman Alan Greenspan continued his back-to-back rate rises and there is no conclusion in sight, at present.

September saw another quarter point rise in the Chairman’s "measured pace" policy as they seek to head off the threat from Inflationary pressures building in the economy. Some speculators in the market had suggested the effects of Hurricane Katrina on the Gulf of Mexico states would be enough to prompt the Fed to pause. However, only Fed Governor Olson dissented and voted for unchanged rates.

The environmental uncertainty is still rumbling in the Gulf of Mexico, as Hurricane Rita seems to have been kind to Texas and the Oil Refineries in the local area. New Orleans saw levees breached again and renewed flooding in some areas. The threat of another storm sent oil prices soaring during mid-September, even with OPEC (Organisation of Petroleum Exporting Countries) increasing their output quotas.

The main disappointment is regarding the type of oil OPEC are able to produce, it is not a type of oil easily refined to ease the current gasoline price rises seen across the western economies. The issue of refinery capacity seems to be an ongoing problem because it is unable to keep up with the heavy demand. The recent shutdowns due to Hurricane Rita have only compounded the problem, although the overall effects should be slight.

World Stock Markets have recovered sharply in reaction to the less than expected damage caused by Rita and are now looking towards the Economic and Sentiment data due out during the first weeks of October. It will be interesting to see how well the markets can continue to shake off the uncertainty and push higher in the run up to the year’s end.

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