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Introduction: Euro hits one-month high after German election
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
This morning, the euro has experienced a notable increase as European investors show relief regarding the results of Germany’s election, though this sentiment is tempered by concerns over a recent decline in U.S. stock markets.
Rising to a one-month peak, the euro benefitted from the success of the center-right CDU/CSU coalition, which garnered 28.5% of the vote, positioning CDU leader Friedrich Merz as the prospective chancellor, pending coalition negotiations.
A significant coalition with the SPD, which landed in third place with 16.4%, appears to be on the horizon.
This potential coalition may keep the far-right AfD (20.8%) in opposition.
The euro has surged to $1.0528 against the dollar, marking the highest value since January 27.
Additionally, it shows some strength against the pound, nearing 83 pence.
Germany’s principal stock index, the DAX, is projected to rise by nearly 1% at the market’s opening.
Experts remain optimistic that Germany’s path to economic recovery, following a challenging period, may become more achievable.
Kathleen Brooks, research director at XTB, shared insights on the critical nature of this election for Germany, occurring at a time of economic difficulties and internal conflicts. A coalition between the major German parties could facilitate effective economic policies, potentially revitalizing growth following two years of economic stagnation.
Restoring economic vigor may necessitate loosening restrictions on public borrowing, a move that could find greater support with the dominant parties collaborating in a coalition.
However, to significantly augment borrowing, Germany would need to revise its ‘debt brake rules’, and there might not be sufficient backing for such changes in the Bundestag.
Holger Schmieding from Berenberg highlighted that the AfD and The Left collectively occupy more than one third of the 630-seat parliament, granting them the power to veto any constitutional amendments.
Schmieding labeled this situation as granting the “populist fringe” a fiscal veto.
While the AfD and The Left may have divergent agendas, they both share skepticism towards aid for Ukraine. The newly formed government is unlikely to reach out to the AfD for constitutional negotiations.
Convincing The Left to support reforms to the debt brake, essential for increasing defense expenditure to assist Ukraine, proves challenging. The Left’s agenda diverges significantly from that of Merz’s proposed policies, creating a complex landscape for finding common ground.
Our main German election live blog will keep you updated on today’s developments:
In other markets, traders are analyzing the decline observed on Wall Street last Friday, attributed to a recent purchasing managers’ survey indicating a slowdown in U.S. corporate growth.
The S&P 500 index fell by 1.7% on Friday, marking its steepest drop in two months.
The agenda
9am GMT: Bank of England’s 2025 BEAR Conference featuring deputy governor Clare Lombardelli
9am GMT: German IFO business confidence survey
10am GMT: Final eurozone inflation data for January
11am GMT: Bundesbank monthly report
6pm GMT: Speech by BoE policymaker Swati Dhingra at the Birkbeck Centre for Applied Macroeconomics entitled ‘Bracing for turbulence: UK inflation and monetary policy outlook’
The German MDAX index for mid-sized, domestically oriented companies is anticipated to rise 1.25% at market open, according to Reuters.
Deutsche Bank: Concern over lack of constitutional majority in coalition
Analysts at Deutsche Bank express a cautiously optimistic outlook regarding the formation of a “more effective government coalition” in Germany over the next four years.
Nevertheless, they harbor concerns that a grand coalition between the CDU/CSU and the SPD may lack the necessary constitutional majority (two-thirds of seats), even if they incorporate the Greens into their ranks.
Deutsche Bank analysts noted:
Constitutional amendments, including those to the debt brake, would depend on the backing of either The Left or the AfD. This dependence may negatively impact market perceptions regarding the likelihood of significant fiscal reforms in Germany.
From a corporate standpoint, the absence of a constitutional majority among the centrist parties does not inspire confidence.
Deutsche Bank also emphasizes that defense spending is poised to be a critical subject in forthcoming coalition discussions:
The prevailing security challenges in Europe make it quite probable for the CDU/CSU and SPD to reach an agreement on increasing defense spending, particularly under the leadership of outgoing Defense Minister Pistorius from the SPD during coalition negotiations.
As the euro and European equity futures experience gains this Monday, they are buoyed by the sentiment that the German elections did not present major upheavals, as noted by Ipek Ozkardeskaya, a senior analyst at Swissquote Bank:
Merz’s CDU/CSU achieved approximately 28.5% of the votes— a commendable outcome for the center-right, albeit slightly below expectations—while Olaf Scholz’s SPD attracted around 16% support, consistent with projections, and the AfD garnered 20% of the votes.
This immediate market response indicates a swift recovery of the euro and equity futures, driven by hopes that increased government spending under the new administration will address the economic challenges of past years.
Source
www.theguardian.com