Equity bulls cheer as Merkel clears Europe’s last hurdle of 2017

With Angela Merkel back at the helm of Europe’s largest economy the path is now clear for bullish investors

German Chancellor Angela Merkel after Sunday’s parliament election. The euro snapped a two-day rising streak and edged lower on Monday after the German election results prompted some investors to lock profits into one of the most profitable currency trades of the year. (Boris Roessler/ via AP)

German Chancellor Angela Merkel after Sunday’s parliament election. The euro snapped a two-day rising streak and edged lower on Monday after the German election results prompted some investors to lock profits into one of the most profitable currency trades of the year. (Boris Roessler/ via AP)

 

Elections in France and Germany were flagged among the key risks for investors at the start of the year, and with Angela Merkel back at the helm of Europe’s largest economy the path is now clear for bullish investors.

Money managers from Franklin Templeton to Credit Suisse Group AG said the weekend’s vote in her favor, albeit in conjunction with the rising popularity of the right wing, boosts their optimism for German equities longer term. Valuations on the DAX Index remain cheap relative to MSCI’s global index of stocks which, together with forecasts for faster earnings growth than the global average, provides a foundation for gains.

“With the German, French and Dutch elections now complete, the political risk from euro-skeptic parties -- one of the main concerns of 2017 -- is now largely alleviated,” said Peter Wilmshurst, who runs a global equities fund at Franklin Templeton.

Markets

The euro snapped a two-day rising streak and edged lower on Monday after the German election results prompted some investors to lock profits into one of the most profitable currency trades of the year. Money managers have piled into the single currency and related bets in 2017, particularly European equities, as the euro zone economy regained momentum and its monetary policy outlook diverged from its counterparts in the United States and Japan, pushing the euro up more than 13 percent this year.

“The impact is limited as the German election results is more of a domestic political story for now rather than a regional European trend and the euro will be more sensitive to any shift in direction from the European Central Bank policy,” said Viraj Patel, an FX strategist at ING Bank in London.

The euro slipped 0.4 per cent to $1.1912 against the dollar on Monday but was higher against the Swiss franc and was broadly flat against the Japanese yen . Merkel did win a fourth term in office on Sunday but will have to build an uneasy coalition to form a government after her conservatives haemorrhaged support in the face of a surge by the anti-immigration Alternative for Germany (AfD). Despite winning the most votes, Merkel’s bloc slumped to its worst result since 1949 and her current Social Democrat coalition partners said they would go into opposition after tumbling to 20.7 percent in projections, a post-war low.

Reuters/Bloomberg