The DAX30 (DE30 on xStation platform) had a phenomenal finish to 2016. While its movement in 2017 was not as notable, the index has still moved higher once more. Right after the US elections, the German benchmark tested a major barrier of 10,000. Now it’s 17% higher. Rather surprisingly, this is an even larger rally than the one seen on the S&P500 (US500 on xStation platform). Whereas the US market benefits from tax cuts expectations and a very solid earnings season, investors in Germany could soon be intimidated by political risks on the horizon. In this analysis, we provide an outlook for the DE30 market and offer our view on the possible dynamic between DE30 and US500 going forward.
Over the past couple of months the DE30 has benefited from a combination of factors including the ECB’s QE extension, decent macroeconomic data from Germany and the global post-US election rally. However, as these positive developments have been priced in, some key risks may have been omitted.
The most substantial risk for the months to come is politics. Depending on final decisions in Italy we may have elections in as many as four major EU countries this year, with populistic and anti-EU parties on the rise. While worries were contained in January, a political scandal in France and a shift in polls in Germany has already shaken this calm by the beginning of February. In France, Francois Fillon, a pro-market candidate, has been hit by a “fake-jobs” scandal and dropped from the first to the third place in polls, leaving markets with a dismal prospect of an anti-EU Marine Le Pen or a left-wing candidate Emmanuel Macron, whose economic proposals could be detrimental for growth and public finances. On top of that a gap in polls between the market-favoured CDU-CSU and the SPD has been greatly reduced in Germany, with the latter gaining ground. Obviously, these election worries may not materialise but if 2016 taught investors anything, it is to expect the unexpected. A further rise in political uncertainty may eventually bite into market sentiment.
Electoral Calendar in Europe