The German federal elections took place over the weekend seeing Chancellor Angela Merkel becoming re-elected for her fourth term. However, it was the worst result that her conservative coalition of the Cristian Democrats (CDU) and Cristian Social Union (CSU) parties has achieved in over 70 years. Votes were predominately taken by the far right, Alternative for Germany (AfD) party, who were campaigning against the influx of migrants seen over the last several years. The party won 12.6% of the vote and are now part of the political mainstream. As a result, their concerns will have a greater influence on government policies going forward. Nevertheless, it is likely that a coalition of the CDU-CSU, the Free Democrats, and the Green will form the next government, although this may take many months to finalise. As a result, the focus of German politicians will be on domestic political matters for the foreseeable rather than pushing forward with Brexit negotiations, reforming the economy or amending budget plans.

The Federal Reserve announced last week that it would start running down its stock of financial assets that were purchased as part of its quantitative easing (QE) programme. This was largely expected. They intend to stop or slow down their reinvestment of repaid securities, rather than turn to outright selling. While the Federal Reserve QE programme stopped expanding in 2014, to maintain the size of the stimulus, the bank reinvests any principal that is repaid, therefore generating an ongoing buying force and downward pressure on yields. The intention is to reduce reinvestment by $10bn per month, which will accelerate over time. Nevertheless, with a bond portfolio of $4.2tn at the current rate it will take approximately 35 years to unwind the programme completely.

In the US, Toys “R” Us filed for bankruptcy. This was from a combination of factors including, disruptive players such as Amazon pressuring sales and margins as well as a mountain of debt causing funding issues. This debt burden was as a result of private equity ownership starting in 2005. However, it does highlight the impact that debt can have on businesses that begin to struggle, even in a world awash with cheap borrowing. While the operational problems appear to have stemmed from consumers changing spending habits rather than reducing overall spending, the filing will add to concerns that investors have to traditional retailing in the US.

German and Japanese inflation and unemployment data will be released later in the week along with GDP and current account data for the UK.