Fund managers brace themselves for a period of political uncertainty for the Eurozone’s biggest economy, as coalition talks between conservatives, liberals and greens in Germany collapsed.
The failure to reach a coalition agreement leaves Ms Merkel with the option to either sign up to another grand coalition with the Social Democrats or to accept a minority government.
Despite these political challenges, initial market responses remained moderate. While the Euro briefly fell against the US dollar, it had already recovered its losses by noon CET.
The failure to reach a coalition agreement put further pressure on the Dax30, which had already seen a challenging month, although the index did not report major losses.
“Stock markets did indeed anticipate difficult negotiations between CDU, CSU, FDP and Greens but market participants did generally not anticipate that the negotiations would collapse. Significant ideological differences were acknowledged but stock markets did bet on an agreement being reached. Especially the fact that the liberal FDP turned out to be the one leaving coalition talks was certainly a surprise” argues Tobias Basse, analyst at NordLB.
For Carsten Mumm, head of Capital Market Analysis at Donner & Reuschel, a minority government and a grand coalition are both unlikely, leaving new elections as the only possible scenario. “The current market response illustrates again that political risks do not tend to have a long-term effect on stock markets. Nevertheless, it is advisable to remain cautious, with the biggest economy in Europe is currently faced with a major question mark. Uncertainty is of course toxic for stock markets. The stability Germany used to represent has suffered as a result of the Federal election, the losses of leading parties and electoral victories of the AfD. A possible re-election is likely to extend this period of uncertainity for stock markets” he warned.