Commenting on the results of the German election, State Street head of macro strategy EMEA Timothy Graf said Angela Merkel’s need to establish a three-party coalition meant “the potential for headline risk” was “at its highest”.
“While the actual market impact is likely to be minimal over the medium-term, this weekend’s result does introduce more risk into European political proceedings than previously estimated,” Mr Graf said.
State Street Global Advisors head of policy and research Elliot Hentov warned “markets should take note” as Germany had become “less predictable” following the election results.
“The success of the populist far-right Alternative for Germany (AfD) is rippling through German politics by removing the conventional coalition options for Merkel,” he said.
“She now has to experiment with the first three-party federal coalition (not counting Bavarian sister party, Christian Social Union (CSU)) in Germany’s history.
“By simple arithmetic, this requires more negotiation and co-ordination.”
It should not be expected that any government formation would “exhibit the usual German stability”, Mr Hentov said.
Similarly, BNY Mellon Global Equity Income Strategy portfolio manager Nick Clay cautioned against “positive reading[s] of [Merkel’s reappointment] taken by markets”, calling it “premature” and citing US President Donald Trump, French President Emmanuel Macron and Brexit as examples of political figures and events that were unexpectedly successful.
“The people are still voting for change and something different, as the status quo is not working for them,” Mr Clay said.
“Therefore, we contend that it would be dangerous to extrapolate the re-appointment of Merkel as the end of populist change.”
However, Templeton Global Growth Fund portfolio manager Peter Wilmshurst held a more upbeat view about Merkel’s re-election and stability in the eurozone at large.
“With the German, French and Dutch elections now complete, the political risk from eurosceptic parties – one of the main concerns of 2017 – is now largely alleviated,” Mr Wilmshurst said.
“The continued stability of Merkel’s leadership will help provide financial markets with confidence, creating a favourable environment for German and EU fiscal management and the strength of the euro, while easing political risk in the wider EU region.”
Ms Merkel and Mr Macron, as pro-euro leaders, would be able to “make inroads toward perhaps greater fiscal integration” and create “increasing demand for credit and improving conditions for the European banking sector”, he said.
