German stocks rose despite the chancellor's party's poor showing in the election. What's going on?

The German DAX stock index and other European indices are rising on Monday, despite the political upheaval in Germany: the drop in oil prices has eased some of the pressure on forecasts for European corporate earnings and helped offset the political shock caused by the defeat of German Chancellor Friedrich Merz’s party in regional elections, according to Investing.com.

The German DAX rose 0.9% on September 21 after falling nearly 2% on Friday, while the pan-European STOXX 600 rose 0.94%. The energy sector was the main driver: Brent and WTI crude oil futures briefly fell by more than 2% following news that suppliers had managed to resume exports from the Persian Gulf countries, bypassing logistical challenges in the Middle East, according to Investing.com. The decline in energy prices pushed concerns about the stability of Merz’s ruling coalition and his ability to implement economic reforms into the background, Investing.com notes.

At the same time, Deutsche Bank analysts warn that, for the markets, these events signal “a further weakening of Germany’s political center and yet another reminder that the factors driving political polarization across Europe have not gone away.”

On September 20, regional elections were held in Germany in Mecklenburg-Western Pomerania (with a population of 1.5 million) and in Berlin. According to preliminary results, the Christian Democratic Union (CDU), led by Merz, posted its worst regional result in Germany’s postwar history, the Financial Times reports . In Mecklenburg-Western Pomerania, Merz’s party risks failing to win any seats in the state parliament. According to preliminary data, the CDU is garnering just under 5% of the vote, failing to clear the electoral threshold (in the last election in 2021, it received 13% there). The far-right “Alternative for Germany” (AfD) won the region, more than doubling its share of the vote compared to 2021—from 17% to 38.1%. The Social Democratic Party (SPD), which governs the state, slipped to second place with 35.5% of the vote, down from 39.6% previously.

In the German capital, the CDU also suffered a setback, slipping to second place with 19% of the vote, according to preliminary results (compared to 28.2% in 2023). First place went to The Left (Die Linke), which had promised to expropriate real estate from large corporate landlords in Berlin and had also capitalized on citizens’ fears of a rise in the far right. As a result, Die Linke received 25.1% of the vote in the German capital, while the AfD came in third in Berlin with 15.8%.

Speaking a few minutes after the polls closed, Merz—against the backdrop of his party’s record-low popularity—attempted to dispel the notion that the CDU’s election setbacks would trigger an immediate crisis in the country’s leadership. The election results were a reaction to the government’s necessary economic reforms, which Merz intends to continue in the interest of “prosperity,” he noted. “Reforms are inevitable. What needs to be done requires resolve, steadfastness, and patience. I will demonstrate this as leader of the CDU and, especially, as our country’s chancellor,” Merz said, while acknowledging, however, that his party’s results in Mecklenburg-Western Pomerania—the home region of former Chancellor Angela Merkel—were a “disaster.”

Now, the election defeat could serve as a catalyst for a leadership change in the CDU and for the chancellor himself, according to FT sources within the party. The situation is compounded by the fact that the ruling party’s defeat came just two weeks after the AfD’s victory in the Saxony-Anhalt election, where the far right is now attempting to form its first regional government.

This article was AI-translated and verified by a human editor