Angela Merkel, Germany’s Chancellor and Christian Democratic Union (CDU) party leader, speaks at the CDU party conference in Essen, Germany (Photographer: Krisztian Bocsi/Bloomberg)

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Progress for German politics is buoying the euro, the U.S. and China may be headed toward a trade war, and North Korea visits Seoul. Here are some of the things people in markets are talking about.

Merkel Makes Progress

Germany’s Social Democrats backed formal coalition talks with Chancellor Angela Merkel after a divisive party convention, marking a potential breakthrough toward her fourth term. A majority of SPD delegates gathered in Bonn on Sunday voted in favor of negotiations to renew the “grand coalition” with Merkel’s Christian Democratic Union-led bloc. Party and labor leaders had argued to move forward with a joint policy outline reached on Jan. 12, rather than walk away from government. Merkel hailed the “positive result” in Bonn before meeting with fellow leaders of her CDU in Berlin to lay out the negotiating path ahead. With coalition talks able to begin as soon as Tuesday, the end of a four-month political stalemate is on the horizon, enabling Merkel to move toward re-inauguration possibly by mid-March. The euro rose 0.4 percent to $1.2270 as of 6:30 a.m. in Tokyo. 

U.S.-China Trade-Clash Fears

The next month will be crucial in signaling whether U.S. President Donald Trump’s threats to get tough on China over trade turn from rhetoric into reality. A year into his presidency, Trump has failed to stem growth in China’s trade surplus as an economic upswing in the U.S. fuels imports from the world’s factory floor. Yet the kind of punitive actions threatened during his campaign haven’t materialized, with Trump ordering his administration to study the challenges instead of slapping on tariffs from the get-go. Now, a raft of China-targeted trade decisions are piling up on Trump’s desk as the deadlines for those assessments loom. The clock is ticking on a decision whether to impose new tariffs on steel imports, while initial reports on aluminum and solar panels are due next week. Outside of geopolitics, trade-related fears are probably the biggest external risks we face, according to Michael Spencer, global head of economics at Deutsche Bank AG. 

North Korea’s Seoul Visit

An advance team for North Korea arrived in Seoul on Sunday as Pyongyang reversed a decision to cancel the visit, a day after signing an agreement with the South to march under a unified flag at next month’s Winter Olympics. North and South Korea on Saturday solidified plans to march together and agreed to compete with a joint women’s ice hockey team in a rare show of unity amid heightened tensions about Kim Jong Un’s nuclear program. With the games to be held in South Korea, the agreement offers a moment of reconciliation amid mounting tensions on the Korean peninsula involving missile tests and military exercises. North and South Korea will enter the opening ceremony in Pyeongchang under a single flag. The two nations haven’t competed as a team in 27 years. 

Watching Those Central-Bank Decisions

The world’s biggest bond market probably needs a little push from central banks to prop up yields at the highest in more than three years. The Bank of Japan and the European Central Bank both have policy decisions this week, before an announcement from the Federal Reserve on Jan. 31. While no action is expected from any of the three this month, investors will be on alert for the latest signals on withdrawal of policy accommodation after years of unprecedented stimulus. Any dovish hints from officials could pull the benchmark 10-year Treasury yield back from the brink: It touched 2.66 percent on Friday, the highest since July 2014. Traders are on edge because technical indicators signal weak support for the 10-year Treasury if the yield breaks even higher. That’s not to say there’s any hint of panic. In fact, strategists are questioning the pace of the ascent in yields, and anticipate a reversal if policy makers signal they’re hesitant to remove the proverbial punch bowl. “If the market is reminded that low rates globally are going to stay low, at least for this year, there’s room for these rates to come back,” said Gennadiy Goldberg, an interest-rate strategist at TD Securities. “Everyone is trying to get all excited about rates moving up today, and one of the biggest pain trades is that rates start moving up later.”

Coming Up…

It isn’t just central-bank decisions that will keep this week’s news cycle humming. Legislators are working to resolve the U.S. government shutdown, and the World Economic Forum takes place in Davos, Switzerland. On the shutdown, the House and Senate were back in session Sunday with a federal government shutdown in its second day amid a spending-bill impasse in Congress. The House is supposed to be on recess this week, but members stayed in Washington as negotiations continue. A bipartisan group of 20 Senate centrists was working Sunday on a compromise plan to get the government funded for three more weeks while the immigration debate continues. But there was no assurance that party leaders -- or the House -- would go along. The shutdown may even affect Davos, as Trump is scheduled to join world leaders and senior executives there, but the trip may be scuttled depending on what’s happening on the home front.

What we’ve been reading

This is what caught our eye over the last 24 hours.

To contact the author of this story: Joanna Ossinger in New York at

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