For better or for wurst...

How the German Election Could Shake Stocks: 6 Scenarios

August 30 by Angelika Dehmel

On 24 September, German voters will be heading to the polls. Will they help Angela Merkel secure her fourth term in office? Will any of the possible outcomes rock the EU? After all, the future of Europe relies more than ever on German politics. And finally, how will they impact the financial markets?

Let’s take a look at all the possible scenarios, from the best to the wurst (sorry, we couldn’t resist!).

Legend:
✝️ – Christian Democratic Union (CDU) + Christian Social Union (CSU)
⚒️ – Social Democratic Party (SPD)
💰 – Free Democratic Party (FDP)
🌳 – Green Party (Greens)
👈 – Die Linke (The Left)

 

Scenario 1: ✝️ + ⚒️
Probability: High as a tourist in Amsterdam

Germany is currently governed by a “grand coalition” between ✝️ and ⚒️. But both have been attacking each other in the press since they disagree on major EU issues. Although neither party wants the alliance to continue, the results may force them to work together again.

A new coalition would mean status quo, so the financial markets are not likely to have much of a reaction. Merkel’s continued grip on power would signal stability and a rock-solid position on the EU. The euro could get a short-term boost while gold, traditionally seen as a safe haven investment, is likely to fall.

Scenario 2: ✝️ + 💰
Probability: Pretty high

If these parties unite, the markets would be as happy as a lush during Oktoberfest: the more conservative, the better. The stocks of banks (Deutsche Bank, Commerzbank) and large corporations are likely to rise, along with export-oriented companies like Bayer, BMW and Siemens.

Scenario 3: ✝️ + 🌳
Probability: Same odds as a Tinder match

They’re unlikely bedfellows but Merkel has said they’re not taking the option off the table.

Auto stocks (BMW, VW, Daimler) might suffer as the 🌳 would want to take action against internal combustion engines, especially in the aftermath of Dieselgate. German banks, like Commerzbank, are likely to feel a tad insecure since the 🌳 want more regulation. Energy stocks, such as E.ON or RWE, might also come under pressure.

Scenario 4: ✝️ + 🌳 + 💰
Probability: As low as a crash test dummy’s morale

Nicknamed the ‘Jamaica’ coalition because of the parties’ combined colours, this alliance would be tricky. Given all their differing stances on big issues, negotiations would likely be long and complicated. While this would bring uncertainty to the markets, there will be some relief over ✝️ leader Merkel remaining in charge.

Scenario 5: ⚒️ + 💰+ 🌳
Probability: As low as a crash test dummy’s morale

This would be the end of the Merkel era and usher in a new one with ⚒️ leader Martin Schulz at the helm. Then it would remain to be seen how much of its coalition partners would weigh in. The 🌳 would push for more environmental and financial regulations while the 💰 will be pro-business.

The leadership shake-up will be enough to get the stock market’s knickers in a twist. With the three parties’ conflicting agendas, it could take time for them to hash it out though. So this uncertainty could lead to some anxious hand-wringing and anxiety in the markets.

Scenario 6: ⚒️ + 👈 + 🌳
Probability: As unlikely as Trump releasing his tax returns

With Merkel out of the picture and the left in power, there would be a greater chance of more regulations and higher taxes. This would bring about a stock market meltdown. Shares would plummet, though the euro would rise along with gold and other safe haven investments.

Havoc would be wreaked on virtually every sector of the market – finance, energy, auto. Export-oriented companies on the DAX index would be impacted since the 👈 is against free trade agreements (and so is the 🌳 to some extent). This would be bad news for companies like Bayer, BMW, Siemens and Fresenius.

But at the end of the day, political impact on the stock markets can be fleeting. Crashes or climbs are typically short-term (like these stocks that were rocked by Trump, etc.) But just watch out for potential risk and volatility when you’re trading around market-moving events like elections. After all, as Brexit has shown us, there’s no such thing as a sure bet!

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