• Hedgeye Investing Summit (A Special HedgeyeTV Webcast Event)

    The sharpest minds in investing discuss the most important market and economic developments and their investing implications.

  • Merkel wins 4th term; a 3-way coalition with the Free Democrats (FDP) + Greens appears to be Merkel’s coalition preference over the formation of a “Grand Coalition” given the poor showing of the Social Democrats (SPD)
  • EUR/USD weakening alongside strong support for anti-immigration and anti-EU/Euro Alternative for Germany (AfD) party
  • AfD with 3rd largest seat in German Bundestag (parliament) may hamper recent efforts from French President Macron and Merkel to push EU/Eurozone project (and combat the rise of right parties across the continent and Brexit discussions)
  • DAX bullish TREND, near top end of TRADE Resistance

Election Results Weigh on Coalition Build

Merkel secures her 4th term as Chancellor, but as is evident from the election results (see table below), Chancellor Merkel’s CDU/CSU and her main rival Martin Schulz’s Social Democrats (SPD) party were big election losers to the Alternative for Deutschland (AfD), the vocal anti-immigration and anti-EU/Euro party.

On a coalition build?  There’s zero chance Merkel includes the AfD as a coalition partner. That said, the weak performance of the SPD suggests the prospect of a return of a “Grand Coalition” is slight. For context, CDU/CSU votes fell to 33.0% from 41.5% in the prior election in 2013, the CDU's worst result since 1949. SPD votes fell to 20.5% from 25.7% prior, the SPD's worst since 1945. Note: a 50% majority must be attained to meet a ruling coalition.

Merkel Secures Chancellor but Political Challenges Ahead?    - AA.1

Jamaica Mon!  More likely, we suspect Merkel will look to build a 3-way coalition with the Free Democrats (FDP) + Greens. This coalition is referred to as the Jamaica Coalition because the party colors of the CDU/CSU (black), FDP (yellow) and Green Party (green) resemble the colors of the Jamaican flag.   Could three parties spell trouble for consensus building? In short, YES, but historically the CDU/CSU and the pro-business FDP have been good bedfellows; the Greens, however, remain a bit of wild card, especially on environmental issues. 

What does the AfD results portend?  The AfD, a party that was only founded four years ago, will become the first far-right party to enter the Bundestag since 1961 (it surpassed 5% of the vote required to enter the Bundestag) .  And it’s worth underlining: this anti-immigration and anti-EU/Euro party will receive the third largest representation in the Bundestag, that’s significant!  The risk we’re spelling out here is the “disruptive” nature of the AfD with views that may be vastly counter to Merkel on both the domestic and international fronts.

On timing of a coalition?  It’s uncertain just how quickly or slowly the “negotiations” will take. However, the Bundestag is due to reconvene on October 24th with the new government in place.

East vs West German Divide.  The AfD polled particularly strong in East Germany, attracting ~ 20.5% of the vote (vs ~ 11% in the West), meaning the AfD’s results could build an East vs West (especially from a media perspective) political divide on every issue that comes across Merkel’s desk.  This aspect is decidedly negative for a Germany that has worked so hard emotionally and economically to become united.

Broader EU/Eurozone Impact. French President Macron has led a push over recent works to create more pan European jobs on finances, budgets, and intra-European and Eurozone decision making, most of which Merkel has at a minimum supported. The AfD, now with a real seat at the table (Parliament), could be “disruptive” to Macron and Merkel’s European agenda. 

Investment Outlook

As Keith mentioned in his Macro Notebook this morning:

  • GERMANY - Interesting to watch the macro moves this morning as the post #election political narratives do whatever they do (Social Democrats got smoked). Bottom line is EURO down -0.5% vs. USD; German 10YR Bund Yield down -4 basis points to -0.40%; and DAX +0.3% as it needs a dovish ECB to maintain any attempt of trying to catch the S&P 500 in 2017.

We continue to suggest tactically shorting the EUR/USD and European equities within our risk ranges (alongside our Q3 Macro Theme of EuropeSlowing?)  That said, we currently have a bullish bias on the DAX over the intermediate term TREND with price reaching the top end ot its immediate term TRADE risk range of 12,369 – 12,645. 

We suspect that today’s decline in the EUR/USD (down around -1% to $1.18) represents a combination of investor uncertainty around the rising strength of AfD and uncertainty around just who Merkel will choose to form a coalition with.  Also, IFO Business survey data out for September showed a decline month over month, which may also weigh on today’s results. [See EUR/USD chart below for our immediate term TRADE levels and the IFO survey chart further below].

Merkel Secures Chancellor but Political Challenges Ahead?    - AA2

Merkel Secures Chancellor but Political Challenges Ahead?    - AA3