DAX Experiences Post Election Volatility, Maintains Rally

The conservative CDU/CSU Alliance took the most votes in Sunday’s election, now needs to form a coalition to establish a government.

• Traditional conservatives win snap election
• Short of an outright majority and will need to form a coalition
• Stability will be undermined by opposing agendas

The DAX reacted positively to the news that the traditional conservative alliance won the most votes. The index opened up 1.4% in the pre-market session, before losing most of that ground and regaining it again.

Unlikely Coalition Only Path

The DAX saw a win from the establishment alliance of conservatives, CDU/SPU, indicating stability. However, the right-wing alliance, led by Merz, has stated they will not form a coalition with the so called extreme right party of the AfD.

This would have seemed the most likely coalition, based on the similarities between the two parties’ agendas. Both want to curb illegal immigration and move away from restrictive renewable energy policies.

Yet, the leader of the CDU/SPU alliance has repeatedly stated that they will not work with the AfD.

The only other possibility remains an unlikely 3-way alliance by the socialist and green parties. While all 3 parties are more friendly towards the EU, they have striking differences in important policies.

DAX Live Chart

DAX

Investor Belief in Stability and ECB Policy

The DAX would likely benefit from political stability, even if there is little change to immigration or energy policy.

However, it seems baffling that the market may see a right-left wing government alliance as stable. The Greens have been pushing for restrictive renewable energy policies, and the socialists have played along.

Both left-wing parties have been soft on illegal immigration also. The stance of these two parties is unlikely to change, while the CDU has made promises, and it seems they would have a hard time justifying a change in policy.

ECB policy is still the main driver of higher valuations for the DAX, and that may help. But at some point the central bank will stop cutting rates, and the focus will remain on government policies.

I see high chances of a highly unstable government in 2025, as the CDU/SPU will need the votes of the AfD if it wants to implement its policies. At the same time that may cause its allies in government to pull their backing.

Gino D’Alessio is a professional Forex trader with 20+ years of experience in the financial markets as a broker-dealer. Having worked in New York and London, Gino is regularly featured on Seeking Alpha. He completed the CAIA program in 2015, which also gave great insight into global macro factors. His main focus is FX majors, indices and commodities.