Monday is shaping up to be a banner day for European shares despite a political bombshell in Germany.
Following CDU’s worst showing since the 1960s in Sunday’s Hesse state elections, Angela Merkel told the party committee that she doesn’t intend to run for another term as head. For their part, SPD logged its worst showing in the state since 1946, barely edging out the Greens. Long story short, the results betray considerable voter consternation at the performance of the federal government.
Merkel does intend to stay on as Chancellor, but will not seek re-election in 2021.
So there’s no power vacuum for now, but this is obviously a political bombshell and speaks to ongoing voter disaffection in Western democracies. According to one Bloomberg reporter who is apparently at CDU headquarters, the mood can be described as “one of shock and disbelief.”
Meanwhile, European equities surged on Monday, with the FTSE MIB leading the way following S&P’s benign ratings decision on Friday. This is shaping up to be the best day for Italian shares since June 11.
One imagines these gains will be faded, but as of this writing, Italian bank shares are on pace for what could end up being their second best day since April of 2017.
The S&P decision is a welcome boost for the likes of UniCredit and Intesa Sanpaolo. Sen and Sub financial spreads are coming in on Monday with Italian lenders leading the tightening in iTraxx.
HSBC’s results were positive and that’s also helping European banks, which will take anything they can get at this point.
And then there’s European autos, which are surging on news that China may slash the tax on car purchases by 50% in the interest of resurrecting demand in the face of the first annual decline in auto sales in 20 years. Here’s the SXAP:
BMW, VW and Daimler are all up sharply. The SXAP is the top-performing group in Europe.
For now, there’s enough good news to overshadow the Merkel bombshell and the fact that she appears set to stay on as Chancellor appears to mitigate any near-term political risk. That said, it could just be that everyone is in a state of shock right now and is reverting to “buy the dip” on a day when there are three clear catalysts for beaten down sectors (i.e., HSBC and S&P’s benign take on Italy for European banks and the China news for European autos).