DE30: Bavarian election results send warning signal to Merkel

Summary:

• Merkel’s coalition member loses absolute majority in the Bavarian state

• DAX (DE30 on xStation5) still struggles to distance from the 11500 pts handle

• Volkswagen (VOW.DE) manager says there is a chance that Germany will lose its lead position in car industry

European equity markets opened mixed on the first trading session of the new week. Gains were seen on the Belgian, Russian and the UK stock markets in the first minutes of trade. On the other hand, shares in Germany, France, Spain and Italy opened lower. Industrial goods and travel stocks were among the biggest European underperformers in the first minutes of trade while refiners and utilities outperformed.

Estimated seat distribution in the local Bavarian parliament after elections. Source: XTB Research

Angela Merkel was often cited as a person responsible for the EU’s migration problems as well as all other misdoings by the bloc. Now, the opposition to her starts to strengthen within her own country. Local elections were held in Bavaria yesterday and their outcome can be named as a breakthrough. Namely, the Merkel’s major coalition partner, Christian Social Union (CSU), lost absolute majority in its home region. Among most often quoted reasons were dissatisfaction with Merkel’s policy and turbulences in the domestic politics in the first half of the year. However, the scale of CSU defeat can be best described by the stellar performance of Alternative for Germany (AfD), the far-right party that strongly opposes Merkel and current government establishment. AfD made it above the threshold for the first time and secured 10.7% of seats in the Bavarian parliament. Greens, pro-European and migrant friendly party, had similar outcome and more than doubled its previous support. Both parties are viewed to be the winners of the ballot but CSU stays reluctant to entering into the coalition with either of them. Free Voters, the Bavarian opposition party that secured 13.2% of seats, seem to be the most likely coalition partner for CSU. Angela Merkel’s Christian Democratic Union (CDU) did not participate in the Bavarian elections but will take their chances in Hesse region vote in two weeks. While CDU enjoyed strong support in the region (Frankfurt is located there) the latest polls see support for her party dropping to the lowest since 1960s. If this turns to be true the current governing coalition may have reasons to concern as it would highlight that the shift in the voting preferences is occuring in the whole country.

Major European stock benchmarks after the first hour and a half of trade:

• DAX (DE30): -0.41%

• FTSE 100 (UK100): -0.32%

• CAC40 (FRA40): -0.61%

• IBEX (SPA35): -0.35%

• FTSE MIB (ITA40): -0.25%

DE30 still struggles to distance itself from the 11500 pts handle. The benchmark is trading a notch below it at press time. In case bulls surrender to bears subsequent downward move could take the price as low as to the vicinity of 10800 pts, the area that served as the upper bound of the consolidation from late-2016. Source: xStation5

Company News

Herbert Diess, CEO of Volkswagen (VOW.DE), expressed some downbeat remarks concerning the German car industry. The executive said that he now sees only 50% chance of Germany maintaining his position as the World’s biggest automaker. Increasing competition from China and the United States may see European state lose its leadership. Volkswagen who is struggling with the aftermath and consequences of the diesel emission scandal sees electric and autonomous cars as a future of the industry and has recently began to focus more on the areas.

Bild am Sonntag reported that the Deutsche Post (DPW.DE) is eyeing significant cost cuts. According to the report, the postal service company may cut as much as 1400 jobs in order to reach its goal of making €5 billion profit in 2020. Apart from that, the company is said to cut on sports sponsorships.

Jochen Hermann, head of electric drives development at Daimler (DAI.DE), said that company wants to offer hydrogen engines in all car models by 2022. The company is currently developing the modular system for the fuel cell that could be used in wide array of Daimler’s cars. New systems will be first used in the electric bus eCitaro. Hermann said that development of the system would boost scalability as well as improve cost situation.

Volkswagen (VOW.DE) resists downward pressure and surfaces as DAX leader on Monday morning. Source: Bloomberg