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German elections unlikely to surprise financial markets

As we head towards this month’s German election this is the one political event in Europe that probably won’t have the capacity to surprise, and the one that markets remain the least nervous about.

This is because whoever wins this month the German government will be led by a pro-European politician, given that Angela Merkel’s challenger Martin Schulz used to be President of the European Parliament.

The only variable is likely to be around the flavour of any coalition government, however it seems highly likely that Angela Merkel will be Chancellor for the fourth time.

This is unlikely to have a significant effect on either the euro or the German DAX, which thus far have been largely immune to anything to do with the state of the German poll numbers.

If anything the recent rise in the euro has helped push the DAX down from the highs that we saw in June as markets look past the German elections and towards the next move in European Central Bank monetary policy, where it is expected that early next year we will see the bank gradually continue to step back from its currently loose monetary policy.

Since May and the election of Emmanuel Macron as French President the euro has risen as much as 10% and this has helped keep a lid on the German DAX given a lot of its companies derive their profits from exports.  

Over the same period the DAX hasn’ t made much in the way of progress at one point being down 4%, though the woes of German carmakers have also helped weigh the index down as the scandal over emissions as well as price collusion continues to weigh on their share prices.

If the euro continues to rise it is going to be very difficult for the DAX to return to the record levels earlier this year, unless we see the US dollar post a significant recovery, or the economic picture starts to cloud in Europe which could then weaken the euro.

The key levels on EURUSD are the highs this year at 1.2090 which if broken could well see a move towards 1.2500, something which German companies could more or less cope with but which could be much more problematic for the weaker economies in Europe.

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