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German Election on 24 September: Earthquake or Non-event?

    

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The two drivers that determine the most likely scenarios and the anticipated impact of the upcoming general election in Germany on the global markets are the 1) party manifestos and the 2) election polls.

Prognosis

From recent big political events like the BREXIT referendum or the election in the US, we did learn how far off election polls can be. Historically, they have been more accurate in Germany but with two-thirds of voters apparently not yet certain about their choice, the eventual results may still be less certain than is currently assumed.

There was only one TV debate between the two main candidates: Angela Merkel, CDU (Union/Conservatives) against Martin Schulz, SPD (Labor). Mr. Schulz wasn’t able to land any big punches on his big topics, including immigration and social justice in an aging society.

Interestingly, the voters seemed to have appreciated his performance after the debate but it was not enough to close the gap to Angela Merkel, although the SPD is still hoping for a Corbyn effect, similar to the last general election in the UK.

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Positions
The party manifestos do not make for light reading, ranging from 78 (Union) to 234 pages (Green).

All parties proposes income tax relief targeting different income groups but in all scenarios GDP could only rise by up to 0.5% over two years combined with a significant increase in infrastructure spending to 1% of GDP.

On European issues, there is agreement across the four German main parties on support for a common defense policy, a hard line in the Brexit negotiations, a strengthening of the external EU borders, and a fair distribution of refugees across Europe. In all these options, Angela Merkel’s CDU would be the dominant party.

 

Scenarios
According to two major polls, the SPD is set to obtain just above 20% of the votes, which would be the worst election result since 2009. Martin Schulz’ performance was seen by many leading political analysts effectively as his application for a leading role in Merkel’s cabinet and not a fight for the top job in Germany and Europe. It seems that he is betting on another big coalition between Union and SPD.

The necessity for this constellation is mainly driven by the strength or weakness of the new nationalist party - AfD. The more successful they are, the more Angela Merkel needs a “big coalition”. The weaker they and the SPD perform on 24 September, the more likely the CDU will form a coalition with Christian Linder who is fighting for the Liberals’ survival (FDP).

The right-wing AfD was looking like the big winner until the end of 2016 and was set to achieve as much as 14% from a standing start. This would give them great influence in German politics. The latest polls indicate that they are more likely to achieve just 8.5% of the votes and become the fifth strongest party, comfortably exceeding the five percent threshold to gain access to the German Bundestag but not strong enough to have any impact now and in the future.

The most likely option for a government remains a grand or, less likely, a conservative-liberal coalition, possibly including the Greens to obtain a majority (Jamaica coalition).

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Markets
If we get the most likely grand coalition scenario we can expect a positive but limited macro impact. As the parties want to fulfill their election promises, a moderate stimulus to household consumption after the September general election is likely. The overall outlook in Germany of about GDP 2% growth in 2017 and 1.6% in 2018 doesn’t change. Most importantly, we get more clarity that the EU maintains a challenging but stable path beyond the BREXIT date in March 2019. In the medium term this could strengthen the Euro and turn the stock market’s attention to the next earnings season.

The big outlier scenario would be a surprise gain of votes for the SPD and especially the AfD. If the AfD would achieve more than 15% this could be interpreted as a very negative indicator for Europe’s future. A precursor for a “DEXIT”, with Germany potentially leaving the EU. This doomsday scenario would indicate the end of the European Union and send shock waves throughout equity markets at a point where the DAX edging closer to its all-time high again. The Euro could be driven to and beyond parity with the US Dollar.

 

EURUSD, Weekly Chart

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DAX 30, Weekly Chart

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WEBINAR INVITATION | 19 September from 7:00pm GMT+1: How The German Election Will Impact Forex Markets

 

About the Guest Writer

Malte Kaub - Malte Kaub is a finance professional with more than 10 years of deep experience in trading. His expert knowledge and network has compressed the learning curve for traders of all experience levels.

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