DE30: Local elections in the background, RWE gains on GS opinion

Summary:

• European indices kick off Monday’s trading in moderately upbeat sentiment
• Local elections in Saxony and Brandenburg showed a surge in support for AfD
• RWE (RWE.DE) on the rise following an opinion coming from Goldman Sachs

Two German states - Saxony and Brandenburg - held local elections over the past weekend where we saw a noticeable increase in support for the euro-skeptic and anti-immigration AfD. As far as Saxony is concerned, Merkel's CDU managed to win, however, a gap to the AfD narrowed dramatically, as evidenced by the chart below. The same scenario concerns Brandenburg where the SPD came first, though its advantage over the AfD shrank notably as well compared to the difference seen in 2014. Leaders of the AfD were satisfied with the results of the weekend’s election as the trend in support remains optimistic for the party.

The euro-skeptic and anti-immigration AfD has dramatically narrowed the gap to the CDU in Saxony over the recent years. Source: Bloomberg

What does it mean for German politics and stability in the European Union? There is nothing new that euro-skeptic parties are seeing stronger and stronger support, especially among young people, and a lot of this surge could be ascribed to an immigration crisis in the Western Europe. This is not the case only in Germany, but similar patterns have been observed elsewhere over the recent years. In our view, it keeps pushing higher downside risks for stability in the European Union, hence moves like this held in June 2016 in the UK (the Brexit referendum) might get popularity. If so, it does not bode well for economic growth and might significantly weigh on sentiment among businesses and thereby act to the detriment of investment.

The German DE30 looks to be poised to attempt to move higher over the coming days. Do note that the index closed up above its crucial resistance at 11 840 points on Friday, a move which could encourage more investors to step in the market. As a result, a pick-up toward the latest highs could be on the cards, but the road to reach it might be bumpy taking into account lots of rises and falls in the US-China trade spat. Source: xStation5

After the first two hours of Monday’s trading we see cautious optimism across European equity markets. The FTSE 100 is the unquestionable leader, however, its strength stems mainly from widespread weakness in the pound (it got another blow earlier today after the manufacturing PMI for August missed expectations). Looking elsewhere, the Italian FTSE MIB is also 0.8% up (the second best index) on the back of expectations the country will dodge snap elections as Giuseppe Conte is expected to present his new government later this week. 

In turn, looking at news from companies one needs to focus on RWE (RWE.DE) being up more than 3% at the time of preparing this commentary. This outperformance has come in response to a note released by Goldman Sachs where the US bank suggested that RWE could no longer be ignored as a major renewable developer. The GS said that RWE could also benefit from the disposal of its E.ON stake which could result in a 15% return on equity, according to GS estimates. As a result, the GS decided to revise its price target up to 35 EUR from 33 EUR (the spot price is less than 27 EUR).

RWE is leading the gains following upbeat comments from Goldman Sachs. Source: Bloomberg