Election Result may Restrict German Government Support for Periphery

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The euro is mixed on the crosses and weaker against the dollar. Merkel’s coalition loses a major regional election over the weekend, in a state run for almost 60 years by the CDU or in coalition. The effect should be seen in less freedom for the German government to take unpopular political stands, such as in nuclear power and economic assistance to periphery countries. The move last week to slow the speed of capital contributions to the ESM was perhaps a foreshadowing of this, an attempt by the German government to appear more in line with popular positions. This does not bode well for the periphery, in light of near term issues with Ireland and Portugal. Irish bank stress tests are to be released on Thursday, with some reports mentioning 20 billion euros as the additional capital to be required. It is also reported that Portugal and Ireland will be seeking bridge loans from the EU to replace their current central bank lending to banks. In addition, an Irish minister states that after the stress tests are announced, Ireland will be seeking European agreement to allow Ireland to share bank losses with bondholders. Portugal’s banks were downgraded by S&P, as expected following their downgrade of the sovereign. Italian debt auction went well today, with no signs of contagion to Italy. GBP is weaker for the 4^th day in a row, helped by more weak data, today’s being a business confidence measure. 1.5930 looks to be the next support for cable. EUR support is at 1.3980/90, resistance on the move above 1.40.