Investor speculation has proven accurate: weeks ago, they anticipated that the new elections would lead to a more business-friendly government in Germany.
The DAX’s rise at today’s opening suggests that this expectation has been confirmed. It appears that Chancellor Friedrich Merz now needs just one coalition partner—the SPD—to form a government. A Grand Coalition is currently viewed as the favorite, as it signifies stability and continuity.
While the long-term performance of the DAX is primarily driven by the international competitiveness of its listed companies, the current political outlook provides an additional incentive. Investors believe that Germany may soon have a government capable of initiating new growth impulses, thus bringing an end to the disputes that characterized the previous three-party coalition under the Ampel government.
However, caution is warranted: despite the optimism, the recent trend of profit-taking that began in the last two weeks could continue. The robust gains in the DAX this morning largely hinge on the perception that a coalition between the CDU/CSU and the SPD is the least problematic in addressing current challenges. At the same time, US President Donald Trump is likely to abandon his relatively gentle stance toward the EU and Germany soon. Whether the new government in Berlin can effectively navigate its relationship with Trump will become clearer in the coming weeks.
Friedrich Merz now faces the significant challenge of addressing a multitude of issues—from stagnant economic growth and Russia’s war in Ukraine to the looming threat of a global trade war, which could further burden Germany’s struggling industrial sector. Promptly tackling these challenges will be crucial for the new government’s success.”
