HUUUUGE victory for Merkel and her party in the German election the other day. Now what/ "Just five seats. That’s how far short of an outright majority incumbent German Chancellor Angela Merkel is following elections yesterday. That now leaves her searching for a coalition partner. In the 630-seat lower house of parliament, Ms. Merkel’s CDU/CSU got 311 seats, the SPD 192 seats, the Left party 64 seats and the Greens 63 seats, according to the preliminary results. Options now include Ms. Merkel seeking a ‘Grand Coalition’ with the Social Democrats or a coalition with the Greens. She did not commit to any scenario Sunday. One thing is certain: Ms. Merkel’s previous junior partner, the FDP liberals party, won’t be joining the party. It didn’t make it at all into parliament for the first time since 1949. Relief over the fact that Germany’s anti-euro party AfD didn’t make it into parliament is lending support to the euro, while the picture for German stocks isn’t as clear cut, analysts say. Already, the euro has reacted well to the result, remaining firmly above $1.35 in morning trading and it looks to set consolidate gains over the short term, Credit AgricoleACA.FR -1.43% forex analysts write. At 0826 GMT, the euro was trading at $1.3515. Germany’s DAX, though up 0.1% at the open, quickly moved into slightly negative territory, as investors tried to make sense of the election outcome. At 0826 GMT, it was back up 0.2% at 8692 points. Utility stocks like RWE and E.On were a tad lower on fears business-unfriendly reforms of energy policy could be high on the agenda of a new government, while bank shares of Deutsche BankDBK.XE -0.34% and Commerzbank benefitted from hopes that the new government won’t be as strict on banking regulation as a Red-Green coalition would have been. Here’s what the analysts think of the likely permutations now PROLONGED UNCERTAINTY WORST CASE: UBS economist Martin Lueck cautioned that coalition building will take time, probably several weeks, which will damp the initial positive market reaction, as markets don’t like uncertainty. Manfred Huebner, managing director of Sentix behavioral finance analysts, said the election outcome was less positive for markets than it looked at first glance. On the one hand, Chancellor Merkel’s CDU/CSU needs a partner to get a majority in parliament, which puts the Social Democrats in a comfortable position in coalition talks, though there is no guarantee they will accept, Mr. Huebner said. On the other hand, it may be easier for the CDU/CSU to agree to the Greens as junior partner, but both parties’ programs clash on critical issues including taxes, minimum wages and joint tax liability, and negotiations may take time, he said. A prolonged period of negotiations and uncertainty could weigh on market sentiment and delay reforms at the European level, such as banking union, Barclays analysts note, pointing out that the CDU/CSU/FDP coalition took 4-5 weeks in 2009, while the Grand Coalition in 2005 took two months until a coalition contract was signed. PROGRESS ON EUROPEAN ISSUES: On the European front, “we expect progress on European issues from the banking union to Greek debt forgiveness to gain renewed momentum after the elections, no matter who wins,” Danske Bank economists said. Many issues were postponed during the election campaigns. Germany’s standpoint on EU issues will likely remain broadly unchanged. As opposition, the SPD approved all decisions regarding Europe, as is it pro-euro, but it might go a bit softer on austerity measures for peripheral countries, Danske Bank says. GRAND COALITION (CDU/CSU and SPD), OR CDU/CSU+GREENS: will boost the euro and narrow peripheral spreads on hopes that central-left parties will revive talk about a euro debt repayment fund for troubled euro zone members, Morgan Stanley analysts say. Berenberg analysts think that Germany will start striking deals necessary to establish banking union by the end of 2014 and could accept some interim solutions rather than insisting on European treaty changes. Analysts expect higher income taxes for top earners, some sort of national minimum wage, caps on rents and a stricter regulation of temporary work, which will weigh on residential real estate stocks and temporary work stocks, Equinet analysts say. A modest increase in government spending with a focus on some infrastructure projects such as power grids and highway bridges will lend some support to construction shares. MARKET VOLATILITY NEXT FEW DAYS: Markets will likely be vulnerable to heightened volatility in the next three days, as capital markets are trying to make sense of the election outcome, DekaBank economists forecast."
Posted on: Mon, 23 Sep 2013 20:12:47 +0000
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