Germany’s Federal election has seen the CDU/CSU secure 28.7% of the votes, while the far-right AfD garnered 19.8%, according to ZDF projections. Market participants are closely monitoring coalition formation to assess potential fiscal reform.
Several coalition options are possible, including a CDU-SPD-Greens alliance. The AfD’s performance was weaker than anticipated, which may influence future policy directions.
Concerns over Germany’s “debt brake” persist, with limited scope for reform amid rising defence spending pressures. The election results are expected to impact European defence funding and could initiate debt brake reforms that may bolster the euro and eurozone stocks.
The uncertain entry of the FDP into parliament may complicate coalition negotiations, which could delay reforms and introduce market unpredictability. Following the election result, the EUR/USD has experienced a modest increase, reflecting optimism for improved economic conditions.
With the political direction of Germany now clearer, attention turns to policy negotiations that may influence markets in the weeks ahead. How a coalition comes together and the compromises made along the way will shape expectations for European fiscal policy.
Friedrich will need to navigate delicate talks, especially given the FDP’s uncertain presence in parliament. Without their input, discussions on tax cuts and budget plans may shift, introducing the possibility of heavier state intervention. If the FDP clears the threshold, their role in any alliance could act as a stabilising factor against expansive fiscal measures. Traders considering positioning around German debt or the euro should be watching these developments closely.
One of the core points of concern remains restrictions on borrowing. Defence expenditures are set to rise, putting pressure on fiscal limitations that some believe are too rigid. Reform would require broad support, which remains uncertain given the CDU and other key players’ cautious stance. A coalition deal that signals minor changes rather than a structural overhaul could constrain fiscal flexibility in the years ahead, something that may influence bond markets across Europe.
The AfD underperformed relative to earlier polling, which may indicate shifts in voter sentiment or weaknesses in their campaign strategy. While this reduces concerns about radical policy moves, their strength in Eastern states could still make them influential at regional levels. Investors in companies with exposure to German domestic policy—especially those in regulated industries—might be factoring in a somewhat more stable policy climate than initially expected.
Meanwhile, the upward movement in EUR/USD following the results suggests market confidence in an outcome that avoids extreme policy shifts. Yet, this relief could be short-lived if coalition talks drag on without clear commitments. Ursula’s team will need to manage expectations carefully, particularly as speculation around European Central Bank policy and broader EU fiscal coordination continues.
Beyond Germany, the broader European defence sector may see renewed attention. If defence spending commitments become firmer following this election, companies operating in this space could attract fresh interest. Investors will be weighing whether increased military budgets translate into stronger stock performance or whether regulatory constraints and procurement delays temper those expectations.
In the coming days, volatility may persist in German equities, particularly for firms sensitive to domestic policy decisions. Currency markets will reflect not just election outcomes but also wider economic sentiment, especially if coalition discussions progress slower than expected. For those trading short-term movements, the balance between political clarity and market confidence will be essential to assess carefully.
