German markets put their money on Kohl

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VICTORY for Helmut Kohl in today's German elections would support a further rally in shares and would lower long- bond yields while improving economic fundamentals and corporate results, analysts say.

Defeat for the current Chancellor, however, would provoke a much sharper reaction. 'The downside potential is far greater than the upside,' according to Jorg Schaper of DG Bank. The 10-year yield could rise to 8 per cent or more if the Social Democrats win, said Thomas Mayer of Goldman Sachs.

With a vigorous rally last week in the closing stage of the election campaign, German markets bet on the return of Kohl and his centre-right government.

Final opinion polls, however, suggested a close-run contest. For even though Mr Kohl's Christian Democrats look set to re-emerge comfortably as the strongest political force, the complex arithmetic of coalition in Germany makes prediction hazardous.

Some of the gains from a continuation of the current coalition have already been built into the market. Analysts stressed that nervousness centred less on the Social Democrats themselves than the unlikely prospect of a government relying on support from the Greens and the former East German communists.

A more likely outcome, if the current coalition fails to garner majority support, would be a grand coalition between the Christian Democrats and Social Democrats.