DAX boosted by Merkel election victory

• DAX boosted by Merkel election victory;

• Chinese HSBC manufacturing PMI improves again in September;

• US debt ceiling negotiations to weigh on sentiment this week;

• Speeches from Fed members key following decision not to taper;

• Eurozone PMIs in focus this morning.

Most European indices are expected to open lower on Monday, except Germany’s DAX, which is expected to open slightly higher following Angela Merkel’s election victory over the weekend.

The German index would probably be even higher this morning, had it not been for the better than expected showing from anti-euro party, Alternative for Germany. These crucial votes forced the junior coalition partner of Merkel’s CDU party, the Free Democratic Party, out of the Bundestag, leaving a grand coalition looking the likely option.

The better showing from the AfD party is a slight concern though. It shows that despite unemployment being low, the economy performing much better than most and Merkel being one of the most popular Chancellors ever, there’s still a growing number of German’s who are no longer willing to foot the bill for the peripheral countries and instead wish to exit the eurozone. This shouldn’t be a problem for now, but will be something that Merkel will be very aware of.

The preliminary reading of the HSBC manufacturing PMI may also be limiting losses ahead of the European open this morning. The figure rose to 51.2 in September, following its surprising return to growth territory last month, which suggests the governments targeted stimulus efforts are having the desired impact. This is especially encouraging as this survey mostly covers small and medium sized private firms, which tend to benefit less from government stimulus that the larger state owned firms. This will help convince the markets that the recovery is sustainable and that minimum growth of 7% is probable, although something closer to 7.5% now looks likely.

While both of these are positive results, investors are clearly more focused on the US still, with debt ceiling negotiations now weighing on sentiment. The Fed’s decision to delay tapering last week did provide a temporary boost to indices, however with no decision now expected until December, the debt ceiling is the next big threat to the stock market rally.

The deadline for a budget to be passed is just over a week away and neither party has so far blinked. The House passed a budget last week that saw huge reductions in spending on Obama care, but this will be quickly rejected by Obama and the Senate. Obama on the other hand is refusing to negotiate at all, claiming the House should agree to raise the debt ceiling for nothing in return.

This is clearly not going to happen and a deal will surely be made, but this inability to work together again suggests it’s once again going to go right down to the wire. Even in this scenario, the can is likely to be kicked down the road and we could even be back where we are now as early as December. This uncertainty is not good for investors and it doesn’t help the Fed’s situation either. How can the Fed be confident that the economic recovery is sustainable if a divided government keeps threatening to derail it. It also doesn’t fill businesses with much confidence as they never know what the future holds for themselves or the economy as a whole. Unfortunately, Congress is more concerned with playing the game than aiding the recovery.

The week ahead is looking relatively quiet in terms of economic releases, so focus will be entirely on Congress and the Fed. No deal is likely on the debt ceiling until next week though, so the big moves in the markets are likely to come from the many speeches from Fed members, scheduled for this week. Today we’ll hear from FOMC voting member, William Dudley, and Dennis Lockhart, who is not a voting member but does tend to share the views of the majority within the Fed. Not only will we be looking for further information about why the Fed chose not to taper from both of these, we’ll also be looking for clues about when tapering could begin, with December now looking the most likely, although it could easily now be next year.

We also have some preliminary PMI readings from the eurozone this morning. Services and manufacturing PMIs from Germany, France and the eurozone will be released, all of which are expected to improve further in September. The recent improvement in the eurozone has provided a major boost to the markets, although this is very fragile. Any early signs from these PMIs that the recovery is not sustainable would quickly change people’s views and weigh further on sentiment.

Ahead of the open we expect to see the FTSE down 12 points, the CAC down 16 points and the DAX up 7 points.