Analysis 25.9.2017: 5 Things to Watch Next Week: Merkel’s Fourth Term, A New Crypto Rally?, Bullish Equities, US Tax Reform, Super Friday

1.            The Aftermath of the German Election

Angela Merkel became chancellor for the first time in a row, still, she cannot be delighted with the results. The coalition behind her got much weaker, the anti-immigration AFD-party surged to the third place of the vote. With those in mind, Merkel might have a much less comfortable period ahead of her, and the power struggle could weaken the position of EU’s central forces. The Euro could lose some steam next week, as the momentum of the common currency’s advance has already been waning lately, and the DAX could also lose some of its recent relative strength.

DAX, 4-Hour Chart Analysis

2.           Cryptocurrencies Gathering Strength?

The segment had a choppy and slightly frustrating week for traders after the previous crash and subsequent surge. Bitcoin, Ethereum, and the other majors continued to trade with elevated correlation as the correction remained dominant. Friday brought a meaningful dip in the coins, but the most important support levels held up during the weekend, and that could point to a bottoming process in the sector. With the long-term picture being much more constructive following the deep correction, traders face much lower risks when entering new positions. That said, the next week could still hold some surprises, and a test of the prior lows is not out of the question, so investors should be ready for another challenging period.

Ethereum showing relative strength this weekend, 4-Hour Chart Analysis

3.           What Could Stop the Stock Rally?

Although the mainstream financial outlets stress that low interest rates justify the current stock valuations, the growth prospects in the US don’t agree. Truth is that, with the exception of the biggest bubbles, valuations have never been so distorted in equities, and expectations regarding long-term returns are very far away from reality. That said the party is still on; the major indices have been showing strength recently and all looks set for another round higher in one of the longest bull markets in history. Until technicals don’t confirm a trend change, traders should wave higher, but investors should remain conscious about the risks and diversify accordingly.

MSCI World ETF, Daily Chart

4.           Trump’s Tax Plan

The Trump-Rally in stocks was in a large part thanks to the expectations of a major tax relief for the US corporate sector. As the POTUS faced strong headwinds even in his own party, the reform process has been delayed, adding to the downward pressure on the Dollar and taming the rally in stocks. The expected tax changes have been partially leaked, and the proposed 20% corporate tax rate is in line with the prior pledges, while the plan would also be favorable for members of the upper income brackets. Donald Trump is expected to give a speech on the matter on Wednesday, and we expect at least a short-term boost to equities and the Dollar from the announcement.

5.           Super Friday in Economic Releases

While the week will already be filled with important numbers coming out (US GDP, Durable Goods, Consumer Confidence, German CPI…), Friday will be the busiest day for traders. From Japan (CPI) to Canada (GDP), there will be crucial reports published all over the world, and especially forex markets could turn volatile before the weekend. The strong trends in the Yen, the Canadian Dollar, and the Great British Pound will be tested, while all eyes will still be on the Dollar following the hawkish Fed decision. The North Korean situation could also take another turn, and safe-haven assets might have they day again after the recent correction.