Summary:

• Elections in Germany will take place on September 24 – the last major political event in Europe this year
• Coalition outcomes could be decisive for market reaction
• DE30 remains in upward trend, could be the most affected

Politics plays a major role on financial markets this year. There was a major focus on France in the spring when a vision of Marine Le Pen becoming the next president paralyzed investors. Then Theresa May stunned markets when she made a (failed) attempt to reinforce her grip on power. On the geopolitical front North Korea keeps investors on alert sequencing missile test. Parliamentary elections in Germany is next on this list. In this analysis we present 8 things you need to know to prepare your trading approach.

Why elections in Germany are important?

Germany is the largest European economy and a leader of the European Union. It’s export driven economy is a powerhouse for the whole euro zone. Changing political landscape with president Macron in France looking for more integration in the EU and Britons about to leave make electoral choice in Germany especially important as it may define future of the Union.

What parties are in the chase and what are the odds?

Electoral system in Germany is quite complicated as voters cast their votes for direct representatives and party lists in 299 districts. Because parties receive compensation seats depending on their results the number of eventual seats in the Bundestag is unknown in advance. What is important though is that a party needs at least 5% votes to make it to the parliament. That leaves 6 parties in the field: CDU/CSU (governing for last 12 years with Angela Merkel at the helm), SPD (currently a junior coalition partner), Left, FDP, AfD and Greens. The outcome of the elections was interesting earlier this year when a support for CDU/CSU and SPD converged after the latter chose Martin Schulz as its candidate to become chancellor. However this development proved to be temporary and a support for CDU/CSU have stabilized above 35% while for SPD it dropped back below 25%. A support for remaining 4 parties is fairly stable below 10% but their presence in the parliament will make it harder for CDU/CSU to nail a majority and will complicate coalition talks.    

CDU/CSU has regained support and is a clear favorite to win the elections. Source: Bloomberg  

What are the main issues during the campaign?

Immigration and security, the economy and future of the EU – in that order. A series of terror attacks, including in Germany, has elevated security concerns and immigration policies to the forefront of the campaign. The economy is always on the agenda and it’s not different this time around, even if the economic reality under Merkel has been more than solid. At the end of the day, German voters may decide on the future of the European Union and the euro is the next Chancellor backs Emmanuel Macron in his bid to create an inner circle of economic and political integration within the EU. However, for the voters these issues are often somewhat distant and secondary to more pressing issues like internal security.

Electoral programs – what do major parties have on offer?

Out of 6 parties that are likely to enter the parliament, the Left and the AFD have two the most radical programs. The Left wants much more welfare whereas the AFD seeks a stricter anti-immigration policies and would prefer a return of Deutsche Mark. However this makes those parties highly unlikely to form a coalition. Other parties have much closer agenda with the FDP looking the most pro-business and Greens having more left-oriented program.  

The 4 parties that could be in coalition talks do not have radically different programs. Source: XTB Research 

Coalitions – are Greens on track to enter the government?

Coalition is in the nature of German politics. Construction of the electoral system makes it very tough for a single party to form a majority government. This has two consequences: tradition of coalitions makes forming one relatively easy yet each party needs to compromise to some degree. As a result elections rarely result in immediate change in direction for the politics or the economy. Looking at the polls two coalition outcomes seem to be the most likely: continuation of the so called Grand Coalition of CDU/CSU and SPD or a Jamaica coalition of CDU/CSU plus FDP and Greens. A Grand Coalition would make sense because it seemed to work well and would be very easy to form. However, SPD could be afraid of marginalisation after serving as a junior partner for so many years. Market oriented FDP is a traditional choice for the CDU/CSU but polls indicate the two may miss the majority and could need Greens to make it work.

When will elections take place and what time the results will be published?

The vote will take place on Sunday 24 September. There are 61.5 million eligible voters who can cast their votes until 6pm CET (5pm BST). Exit polls will be published immediately after the voting ends with early results coming as soon as 15 minutes later and final results being published on Monday.

Market reaction – 3 markets to track

Elections could have an impact on markets like DE30 (DAX30 futures underlying), EURUSD and BUND10Y (10-year German bond futures underlying). A “market friendly” result could in theory result in a positive reaction on DE30 and EURUSD and negative on BUND10Y. However, do keep in mind that these markets are affected by many factors and we cannot isolate an impact of the elections. DE30 could be the closest to reflect it in the near term as it represent 30 major companies in Germany so we will place our focus here.

DE30 – is CDU/CSU positive for the markets?

Investors like election outcomes that offer stability and promote parties with pro-business solutions. From that point of view an outright majority for CDU/CSU could be a preferred scenario. However, it seems unlikely according to polls and markets could be satisfied with the CDU/CSU plus pro-business FDP the most frequent post WWII coalition. If such a combination falls short of majority the third best option could be a continuation of Grand Coalition (with SPD) because it offers stability. A Jamaica coalition (CDU/CSU, FDP and Greens) could be seen as a bit risky because FDP and Greens could clash on many fronts. It is hard to imagine a government without CDU/CSU but a Red-Red-Green coalition (SPD with Left and Greens) could cause an unease on the markets because of concerns about economic proposals. Finally, a strong combined result for the Left and the AfD could be also negative for markets indicating a rise of populism in Germany.

Initial reaction on DAX30 was the most positive in 2009 when CDU/CSU was able to form a coalition with FDP. Source: Bloomberg, XTB Research 

Looking at the past 4 elections the DAX30 gained over the first month in 2002, 2009 and 2013. However many factors could impact the stock market over such a long period of time. Looking at the first 2 trading days we had very positive reaction in 2009 when CDU/CSU was able to form a coalition with FDP and a broadly flat result in 2013 when CDU/CSU secured only a narrow victory over SPD and a Grand Coalition had to be negotiated (however a success of these negotiations could be positive as DAX rose in the following days). In 2002 when there was nearly a draw and SPD formed a coalition with Greens we saw a negative initial reaction whereas 2005 (narrow CDU/CSU win) was negative both in short and medium term.

DE30 remains in a clear upward trend. Source: xStation5 

Finally, let’s take a look at the DE30 chart. We can see that the market is in a clear upward long-term trend and a support line has been defended. Moreover, a candle defending the line had a long lower shade, suggesting strength of demand. The key support seems to be placed at 11875 pts. (it has been defended) while the key resistance remains at 13000 pts.