The German Conservatives Party emerged victorious in the recent federal election, capturing 28.6% of the vote. This outcome positions Friedrich Merz, the leader of the party, as the likely next chancellor. The election results suggest a two-party coalition government with the Social Democrats (SPD), potentially leading to positive developments for the German economy and a stronger presence in the European Union.
Despite the success of the Conservatives, the election outcome presents challenges for defense spending and support for Ukraine. The combined votes for the far-right and Left party totaled 34.3%, highlighting potential hurdles in these areas. However, the anticipated coalition between CDU/CSU and SPD offers a more stable political landscape, which could reduce parliamentary fragmentation.
The German election has sparked optimism about the country's economic prospects. The victory of the Conservatives was well-received by financial markets, with the EUR/USD pair reacting positively. Analysts expect a more unified Parliament, which could facilitate smoother legislative processes and economic reforms.
Globally, risk sentiment turned sour at the week's end, leading to a decline in equities. However, US futures showed a slight uptick, aligning with similar trends in European markets. The US PMI reading mirrored the European print, with the manufacturing index improving to 51.6 from 51.2, exceeding expectations of 51.5. Conversely, the services measure declined to 49.7 from 52.9, falling short of the anticipated 53.
In the UK, retail sales for January surpassed expectations, with retail sales excluding auto fuel rising by 1.2% year-on-year, compared to the forecasted 0.6%. Despite this positive data, the overall report leaned towards the weaker side. Manufacturing fell short of expectations at 46.4 compared to a projected 48.5, while services performed better than anticipated at 51.1 versus an expected 50.8. The composite measure remained relatively unchanged at 50.5, slightly below the forecasted 50.6.
The German election results have revived hopes for a brighter economic outlook in Europe. The potential coalition between CDU/CSU and SPD is seen as a stabilizing factor that may enhance Germany's role within the EU. This development is expected to foster stronger economic collaboration and growth across the region.
Financial markets have responded positively to Germany's election outcome, with the euro gaining strength against major currencies. This reaction underscores the confidence investors have in Germany's future leadership and its ability to navigate economic challenges.