10 February 2020 by jbchevrel
The German political system is adapting to the recent and fast rise of the far-right, there. Indeed, the AfD has come from 5% in the polls to 15% in just 5 years. The resignation of Annegret Kramp-Karrenbauer (AKK) from the position of CDU party chair is the first ‘real’ consequence from what recently happened in ex-GDR Thuringia (in short -- CDU members of the local parliament collaborated with AfD and FDP to elect state premier). The market’s base case is still that the current coalition will complete this parliamentary term (till next scheduled gen. elec. autumn 2021). However, the risks of a coalition break-up have undoubtedly risen. The new SPD leadership might use that development as an opportunity to quit and de-solidarize from CDU, to avoid sharing the latter’s popularity hit. However, this sounds like a <<50% scenario because the SPD is still very weak in the polls. Hence why it looks unlikely to want new elections just now, while this would be the most likely next step, in case of a CDU/CSU-SPD break-up. For reference, the polls are currently CDU/CSU (centre-right) ~30% Green ~25% AfD (right-wing) ~15% SPD (centre-left) ~15% FDP (centre) ~10%. That said, at this stage the polls don’t fully capture the impact of the Thuringia development. One could expect the SPD (and others) to gain popularity, at the expense of the CDU/CSU. In case this materialises to a decent extent, this could skew things and make a break-up more opportune for the SPD. We only saw a transient and small (if any) under-performance from DB and CMZB in CDS space. Indeed, DBSLAC widened by +2bp and CMZBSLAC widened by +2bp this morning, while the average move of Snr32 constituents was wider +1.1bp. But we then closed DBSLAC +0.5 CMZBSLAC +1.5 Snr32 FV +0.8. In subordinated space, DBSUB widened by +8bp and CMZBSUB widened by +4bp this morning, while the average move of Sub32 constituents was wider +2.4bp. But we then closed DBSUB +5 CMZBSUB -0.5 Snr32 FV +1.5. Other than that, HVBSUB closes +6bp. DB and CMZB shares fell by -1.3% and -1.0%, while the broader SX7E fell by -0.6%. In rates space, 10y Bunds richened -2.5 and 10y USTs richened -4. No remarkable under-performance there either. However, in FX space, the € lost ground vs both $ and CHF, reaching the low end of the recent range vs those two currencies (1.091 and 1.066 respectively). German politics is only one factor among many, first one being the potential n-cov impact on an already structurally weak economic bloc.