German Elections Outcome To Have Limited Impact On Markets In Short-Term

Merkel gets most votes in German electionsGerman chancellor Angela Merkel

There were indeed some surprises in yesterday’s general elections in Germany. While Angela Merkel’s CDU/CSU remains the largest party, its former ally, the SPD, has ruled out forming another grand coalition.

A further significant outcome of the polls was the strides made by extreme right populist party Alternative for Germany (AfD). It came in third place, winning 13 of the 16 seats in the regional parliaments, and guaranteeing its entrance to the Bundestag for the first time in almost six decades.

Despite the unexpected elements, most analysts and economists believe the impact of the elections on the financial markets will be limited in the short and medium-term.

But with the status quo of the Grand Coalition no longer available, there will now be a period of uncertainty, and it’s not expected to be easy for Merkel to form a new government.

A Jamaica coalition, with the conservatives teaming up with liberals and the green party, “would be the most logical and expected option,” says Diego Jiménez-Albarracín, Head of Equities at Deutsche Bank’s Centre for Investments. But he warns about the “absymal ideological gaps existing between the Greens and the FDP.”

As far as the impact of the elections on the German economy is concerned,  Jiménez-Albarracín explains:

“Our economists believe that once the coalition is formed, the effect will be positive mainly due to the stimulus measures promised by the CDU in their electoral campaign. Fiscal measures and more spending on infrastructure, investigation and defence should be the new government’s key milestones.”

As far as European integration goes, Jiménez-Albarracín says the CDU victory could rekindle the spirit of cooperation between France and Germany, which emerged after Emmanuel Macron’s election victory.

“Merkel has emphasized the possibility of a change to the European treaties to advance in the community’s integration. It seems a good time now, with almost all the Eurozone members meeting, or about to meet, their deficit targets. But Merkel’s possible partners could present problems, with the FPD against greater integration. It also believes Germany’s contribution to the European budget is excessive.”

Looking ahead to the medium and long-term impact on the markets, Deutsche Bank AM says the implications of the election results on future ECB policy, “as well as Germany’s position towards European integration and relations with the peripheral countries, should boost both German and European equities.”

With regard to the bond markets, Jiménez-Albarracín  says Deutsche Bank AM’s economists don’t expect any changes in bond issuance policy “whatever the governing coalition turns out to be.”

“Doubts and uncertainty will arise over the coming weeks until the new government is formed. But we think the impact on the markets will be limited. In a short time, they will once again focus on fundamentals.”

Both BofA Merrill Lynch and Julius Baer point out the possible effect on the markets of the uncertainty now surrounding Germany’s political situation. The former explains that:

“With the status quo in Germany (ie a grand coalition) no longer an option, the political agenda for the next four years is particularly opaque…Market perception of highly predictable and stable German politics may be challenged.”

For Christian Gattiker, Chief Strategist and Head of Research, Julius Baer, the elections result should have a somewhat limited impact on financial markets in the medium-term.

“If anything, uncertainties are Bund-friendly, peripheral bonds unfriendly, neutral for equities and negative for the euro.”