‘This Looks Less Market-Friendly Than Expected’: Will German Results Weigh On Euro?

Although Angela Merkel triumphed as expected on Sunday, the results were anything but ideal for the chancellor.

As detailed extensively in our election post, the coalition building process is likely to be fraught and beyond that, AfD’s surprisingly strong performance has served to install a far-Right party in the Bundestag for the first time in six decades.

This headline does not bode particularly well:

• SCHULZ SAYS COOPERATION WITH CDU, CSU HAS ENDED

“Germany’s Social Democrats said Sunday they will not continue governing in a ‘grand coalition’ with Angela Merkel’s conservatives after projections showed they had scored their worst general election result in post-war history,” Politico notes.

“We obviously didn’t manage to hold and expand our traditional voter base, even though we had many social achievements in the last four years,” Martin Schulz said, acknowledging the disappointing numbers.

SPD’s decision means AfD will not be the official party of opposition.

To be sure, this looks like it will hit the euro in early trading. The single currency will likely knee-jerk lower against both the yen and the franc and you can expect to see a flight-to-safety bid in fixed income.

The irony here will probably be that bunds will be bid despite the fact that the initial risk-off move will have been precipitated by events out of Germany.

Bottom line for markets from SEB cross-asset strategist Thomas Thygesen:

The result is Angela Merkel as expected, but her mandate going into negotiations about deeper euro integration does not look quite as strong, says SEB cross-asset strategist Thomas Thygesen. It looks like marginally less market-friendly than expected.