Who is voting and why?
Following last year’s German elections enough seats were not obtained to secure a majority government with just the CDU/CSU alliance. Initially, the alliance tried to strike an agreement to form a ‘Jamaica’ coalition. However, these talks broke down and Merkel instead turned to Martin Schulz’s SPD party. SPD party members have until Friday 2nd March to decide yes or no to the proposed coalition with Merkel. Results are likely to be seen in the afternoon of Sunday 4th March.
What happens if they vote yes?
It is likely the SPD members are going to agree to the CDU/CSU/SPD deal, as recent polls
suggest 56% of voters support the coalition. If this is the case, any short-term political uncertainty will be put to rest, however, any policy differences may create some hurdles for the coalition later down the line.
If they vote no?
Either a minority government will be formed, or new German elections will be taking place. SocGen believe the chances of a new election are high if the majority vote no. Following a new election, the SPD may not be in the race, as recent polls showed the SPD received less than 20% of votes, with only 14% of German voters supporting Nahles as chancellor, compared to Merkel’s 48%. This may be enough to sway some of those voting no in the SPD. Also, UBS note a new election may lead to a delay in discussions and decisions on the Eurozone reform.
Markets are expecting the 10y Bund to be relatively unmoved following the vote as traders look out for next week’s ECB meeting. However, UBS note, along with the Italian election, the spreads between peripheral bonds may widen in the event that the SPD votes yes and the Italian election proves to be indecisive.
Equity and FX markets see very limited risk on this event, but SocGen do note if the vote
passes it does support their bullish position on EUR, but if it doesn’t pass, it supports their long
DAX/short FTSE MIB position on the basis that the FDP could enter the government and potentially act as a headwind for peripheral assets.