German Establishment Routed: AfD Second In Former East Germany; Result "Less Market Friendly Than Expected"

The first sellside comments on today"s German elections - which as a reminder was a disaster for the German establishment, following the worst showing for the CDU/CSU since 1949 and the worst result for the SPD since 1945 with support for both parties tumbling since the 2013 elections...

... have started to trickle, in and according to SEB, the result is ‘less market-friendly’ than expected.

Quoted by Bloomberg, SEB cross-asset strategist Thomas Thygesen said that the result is a victory for Angela Merkel as expected, but her mandate going into negotiations about deeper euro integration does not look quite as strong.

"It looks like marginally less market-friendly than expected,” Thygesen said adding that “I’d say this is in line with our expectation that the euro would pause around $1.20 vs dollar and then maybe retrace a couple of percent over the autumn.”

“The AFD above 10% suggests that even here the stakes are high: if the European project doesn’t fly this time in a way that voters like, Germany could look less politically stable in a few years.”

A note from Pantheon"s Claus Vistesen is similarly concerned about the election outcome and the viability of the upcoming coalition:

At a first glance, it seems that building a coalition government will be a little trickier than markets had expected. If the exit polls prove accurate, the major parties—CDU and SPD—have suffered a drastic setback compared to the elections in 2013. CDU is projected to come out top with 32.5, of the votes, but this is far-, from the 42% in 2013. Similarly, the social democratic SPD have been pegged back to 20%, compared to just under 309, in 2013. The voter-flight from the two main parties appears to have gone in two opposite directions. The populist—and nominally EU sceptic—AFD is set to become the third-biggest party in the Bundestag with 13.5% of the votes, significantly better than the polls were predicting heading into today"s vote. But the liberal FDP also is expected to have had a good day, securing 10.5% of the votes.

Assuming the exit polls are accurate, Angela Merkel—who almost surely will remain as chancellor—has two options, assuming that a government with AFD is out of the question. She can form a two-party grand coalition with SPD or she can go for a coalition with the greens—set to gain 9.4%—and FDP. Our bet is on the latter—we doubt the SPD will go into a grand coalition given its after all scathing defeat—but this will be a slender coalition. Mrs. Merkel is a battle-hardened builder of coalitions, but she will need to draw on all her experience to form one, which can actually get things done.

On balance then, we see the exit polls are slightly negative from the point of view of risk assets in the Eurozone and the euro exchange rate.

The result also increases the risk of re-elections, but we would put the probability of this at under 15%.

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Finally, in yet another shock for Germany"s establishment, according to Europe Elects, the nationalist AfD was the second strongest party in former East Germany, the more economically backward segment of Germany.

We now await other analyst observations which we expect will be equally dour on today"s election result, and as a result the EURUSD is set to tumble once it opens for early trading.

Shock Poll Shows Merkel Losing Chancellorship If Elections Held Today; JPMorgan Stunned

Overnight we reported that Germany"s default swaps spiked to the highest level since Brexit as a recent poll showed that Merkel"s lead in the polls had slid to multi-year lows ahead of Germany"s elections later in the year, provoking some concerns that a formerly unthinkable "tail risk" outcome was becoming more likely. However, according to new data unveiled today, Merkel"s headaches are only just starting, because in a brand new poll released this afternoon, the CDU would get 30% of the vote, while the suddenly resurgent SPD would get 31%. This means that the SPD"s new head, Martin Schulz, would enter any coalition talks as the leader of the largest party, hence becoming Chancellor, leading to a stunned reaction by JPMorgan.

In a note released this afternoon by JPM"s Greg Fuzesi, the strategist writes that following the recent resignation of Sigmar Gabriel as leader and chancellor candidate of the SPD, there has been much attention on how his replacement Martin Schulz would perform. Having spent most of his career in the European Parliament, most recently as its president, and being relatively unknown in Germany, this is not easy to predict. In his first major TV interview, he was recently pressed to explain how exactly he differs from his predecessor Gabriel and also from Chancellor Merkel, and what his focus on fairness would mean in practice. This was not entirely straightforward for him.

Nevertheless, opinion polls were beginning to show a bounce last week and this appears to be continuing.

This afternoon, a new opinion poll from INSA showed the SPD gaining further support and overtaking the CDU/CSU for the first time in many years. If elections were held now, the INSA poll suggests that the CDU would get 30% of the vote, while the SPD would get 31%. This means that Schulz would enter any coalition talks as the leader of the largest party, hence becoming Chancellor.

It also means that a SPD-Green-Left coalition would currently win exactly 50% of seats, so that a government without the CDU/CSU could even be possible. In effect, the SPD has gained 10%-pts of support in past two (weekly) INSA polls, taking votes away from all other parties (see second chart below). Interestingly, the AfD has also suffered a significant decline.

Given that Schulz is relatively new to German politics, a novelty factor may be partly responsible for the jump in the polls. It is far too early to say whether this will endure, given that the election campaign has yet to properly begin. It will also be important to see whether other polls replicate the swing. The SPD has gained support in all recent polls, but these are all a week or more old and do not show the latest jump in the INSA poll. That said, there is no reason to dismiss the INSA poll. It is the newest organization and the only one to be done entirely online, but it (arguably) performed only marginally worse than other polls at the last Bundestag election.

A Schulz-led SPD-Green-Left coalition or a Schulz-led grand coalition would certainly be a huge event in German politics. Such possibilities no longer look like tail risks. A SPD-Green-Left coalition would bias German policymaking towards greater fiscal expenditure and investment, and center-left policies. But, even such a coalition would not mark a dramatic break with the past in many areas and would, we expect, continue Germany’s strong support of the EU and single currency.

In short, "Chancellor Schulz" may be just what Brussels, and to a lesser extent President Trump, ordered.