Germany has voted, and a new government with the upcoming Chancellor Friedrich Merz will soon take office. Investors and traders are understandably wondering whether this could lead to another record run for the German DAX index, especially after it gave up some gains towards the end of last week. Overall, the leading index has already posted a remarkable performance of over 12 percent this year, which is extraordinary.
The problem, however, is that the market may have already priced in Friedrich Merz's chancellorship in advance, and the election result merely confirmed this expectation. Will this still manage to surprise some investors? Probably not. Instead, the market is likely to focus on the potentially difficult coalition negotiations with the junior partner, the SPD, in the coming days and weeks. This could lead to further corrections, especially since seasonal data suggests that February has the potential to give back some gains.
On a positive note, the U.S. under Trump is sending encouraging signals, which could benefit transatlantic relations with Germany and Europe’s most important ally, especially given concerns about growing isolation—a trend already hinted at in the Ukraine conflict negotiations.
Euro Reaches 4-Week High: Is This the Trend Reversal?
The election results have certainly been favorable for the euro. Following the announcement of the first results and the subsequent Asian market opening, the common currency saw expected gains, rising by 0.5 percent to now trade above 1.05 USD. This marks a 4-week high for the euro and could signal a trend reversal.
The focus now shifts to the timeline for coalition negotiations and, more importantly, the contents of the potential coalition agreement. One thing is certain: coalitions require compromises, and the market is keen to see what concessions will be made. The key question is whether the strongest economy in the European Union can emerge from its recession and once again position itself as an economic locomotive.
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