Elections in economically powerful countries like Germany have always provided an opportunity traders can take advantage of, because of the market volatility that preceded them.
The uncertainty that surrounds an election result creates turbulence in the markets, which are exactly the conditions traders need to make bigger profits on their trades.
If recent history has taught us anything, it is to expect the unexpected when the German Election takes place on Sunday 24th September – regardless of what exit polls and the media are reporting will happen.
EXIT POLLS ARE LESS RELIABLE THAN BEFORE
Opinion polls have consistently predicted that Angela Merkel will secure a fourth consecutive election victory for her Christian Democratic Union (CDU) party and their sister party the Christian Social Union (CSU).
However, exit polls are not as reliable as they once were. Britons were expected to vote against Brexit and Hilary Clinton was considered a more likely US President than Donald Trump.
The pulse of the voter is far more difficult to anticipate, and more susceptible to change.
The impact of social media and other, less predictable influencers, can have a significant effect on the opinions and perceptions of voters, especially in those critical last few days before the election itself takes place.
No outcome is certain until the last votes have been cast.
MARKETS BECOME MORE VOLATILE AROUND ELECTIONS
This uncertainty creates volatility in the markets, which tends to become more pronounced as the polling date approaches and even more so if the outcome is in the balance.
That volatility is magnified when an unexpected outcome is declared, as when Britons voted in favour of Brexit.
This is why the German election offers the potential to make some money.
In the immediate aftermath of the Brexit vote Sterling (GBP) plunged to its lowest level since 1985, and two years later it has yet to recover.
Another unexpected result in Germany would trigger another period of market turbulence.
Traders are already calculating how to react depending on the outcome. This is an opportunity to make significant profits – it’s a question of picking up on the right indicators.
HOW WILL GERMANS VOTE?
On the face of it German voters have less reason to produce a surprise result. The country is economically strong and thriving. But recent statements and actions by Merkel, such as her decision to welcome over one million refugees into Germany came in for heavy criticism and resulted in her personal popularity dropping to its lowest in years.
How much of an influence will this have on voters come the election?
Merkel’s record as Chancellor is impressive. She has successfully navigated the recession that has affected most of Europe. But their manufacturing might has never been in doubt, Germany was always better prepared than its European neighbours to come through the economic crisis in good shape and without its people suffering any great hardship as has been witnessed in other countries.
If the economy isn’t a significant factor affecting voting then other matters could be more prominent in voters’ minds. Germany’s role in a fragmenting Europe, or its support of military campaigns abroad against Isis and the retaliations it has provoked in France, the UK and Spain may persuade votes that a change in policy is needed.
COALITION IS THE ONLY CERTAINTY
Despite being the dominant party, Germany’s electoral system has required Merkel’s party to form coalitions in all three of the CDU/CSU’s successes. If anything is certain about the forthcoming election it is that it will be another coalition government that takes power.
In 2013, the previous coalition government failed to gain the necessary majority of seats needed to maintain power. Coalition partner, the Free Democratic Party (FDP), attracted less than 5% of the vote which resulted in a coalition being formed with the Social Democratic Party (SDP). It was referred to as “a grand coalition”. But this may not be repeated given the fall-out between the respective leaders – Martin Schulz of the SDP and Merkel – over the issue of immigration.
Schulz is considered Merkel’s biggest challenger as Chancellor. The SDP are expected to achieve around 25% of the vote according to the latest opinion polls, making them the CDU/CSU’s biggest competitors.
Schulz’s popularity has strengthened following his stint as President of the European Parliament and he is liked by a significant number of the country’s voters.
If Schulz was to overcome Merkel on September 24 it would send shock waves around the world, the markets are likely to go through another period of instability and the Euro (EUR) might be affected in the same way Sterling (GBP) was affected by Brexit.
If Schulz garnered a greater portion of the vote, but not enough to replace Merkel, it could still increase his influence on policy making. Assuming the coalition remained intact, the Euro (EUR) is likely to strengthen as Schulz is in favour of strengthening the EU.
Some will certainly feel backing the Euro (EUR) makes a lot of sense as the election approaches. Schulz’s heavy criticism of Brexit (he called for the UK to re-run the referendum) could have further ramifications for Sterling (GBP). The prediction by one prominent global investment bank that Sterling (GBP) will be valued on a par with the euro by the end of 2017 would seem far more likely.
Merkel has been far more diplomatic to the UK following Brexit and promoted the benefits of Germany and the UK maintaining a strong economic partnership. Following through on this stance will raise optimism that Sterling (GBP) will rally.
CREATING COALITIONS DISRUPTS THE MARKETS
In the days before the elections prominent European indices, notably Germany’s DAXX and the wider European indices such as STOXX 50, expect increased volatility. This will be magnified or return to stability dependent on the outcome of the September 24 vote.
However, if a revised coalition is created, this might also prompt increased volatility.
After the last German election it took around three months for the new coalition to be sworn in. Equity markets fluctuated between periods of increased volatility and inaction during that period, depending on how coalition negotiations were perceived to be going.
The Euro (EUR) was similarly affected until the outcome was confirmed.
Staying up-to-date with the events leading up to the elections and observing the effects they have on the markets will give an insight on how the markets will react as we approach September 24.
Clearly, we shouldn’t be surprised if another ‘shock’ result came about. But whatever the eventual result the opportunity lies in judging how the market is reacting every step of the way and taking full advantage of the opportunities as they arise.
