UBS' preview of the German election gives Angela Merkel a 90% probability of retaining the chancellery

The main points from the bank (the full preview runs to 16 pages! - kudos to UBS):

Outlook:

  • Opinion polls point firmly to Angela Merkel retaining the chancellery following Sunday's election. As the SPD continues to lack traction shortly before the election, we have raised our probability of Merkel retaining the chancellery from 85% to 90%. Although a grand coalition remains our base case (CIO estimate: 60%), uncertainty is much higher when it comes to the CDU/ CSU's future coalition partner. In this note we have drawn up a set of questions and answers based around the different coalition scenarios and implications these political unions may have.

Markets:

  • The short-term market impact is expected to be muted as a populist is unlikely to assume the post of chancellor. However, in the medium to long term, the CDU/CSU's future coalition partner(s) may influence the euro, equities and Eurozone bond yields given the implications for the speed of European integration, the stance to the Eurozone periphery and the nominations for European institutions.

What we are watching:

  • Polls, comments from politicians and the fragile EU-Turkey deal on refugees

But, a bit more ... here is UBS on what election means for the European Central Bank ...

What are the implications for Mario Draghi's successor?

  • The CDU/CSU may have to give up the finance ministry to build a coalition. Becoming free after the German election, Wolfgang Schäuble would then potentially claim one of the numerous key European posts, such as, for example, the anticipated Eurozone finance minister post or the European Commission (see fig. 7). The current European Commission president - Jean-Claude Juncker - has already announced that he will not run in 2019. To bridge the gap, Schäuble could take up the Eurogroup presidency, as Jeroen Dijsselbloem is set to leave the Eurogroup by the time the new Dutch government is formed (expected by the end of 2017).
  • With Schäuble running a European institution, the ECB would probably go to a non-German in 2019 as Germany already holds the presidencies of the European Stability Mechanism and the European Investment Bank. Given that the latter two institutions have direct fiscal implications for Germany, we expect the German government to wish to keep these positions. A German running the European Commission, Eurogroup or even the anticipated Eurozone finance minister post rather than the ECB may also be more investor-friendly as Schäuble at any of these institutions may mean more fiscal discipline in the Eurozone, but also an investor friendly ECB.