Analysts were divided on prospects for the stock market depending on whether they gave greater weight to the clearly improving economic fundamentals or to the increased risk of political difficulties caused by the government's mere 10-seat majority.
'We expect the re-election of the Kohl government to be the trigger for the market to return to fundamentals and to rally over the next four to six months,' said Christoph Anhamm, of UBS in Frankfurt.
Michael Teige, head of institutional research at DG Bank in Frankfurt, said: 'I see the DAX index at 2,300 to 2,400 by the year's end. We are expecting bond market rates to ease, creating some room for shares to rise.'
Although the confirmation of the centre-right coalition removed fears of a switch in fiscal policy that might have come about with a victory for the left, the narrowness of the majority placed big question marks over the ability of the new Kohl administration to accelerate its budget consolidation and de- regulation programme.
Not only has the government been weakened, but it will have to negotiate all key pieces of legislation with an upper house even more firmly in the hands of the opposition Social Democrats.
'In this environment, the new Bundestag (lower house) appears less likely than before to make major progress on fiscal consolidation through public spending restraint, economic de-regulation and other measures to promote German competitiveness,' said Kim Schoenholtz, of Salomon Brothers.
Hans Tietmeyer, president of the Bundesbank, made clear in a newspaper interview yesterday that curbing the role of the state in the economy was the central task facing government. The willingness of international capital markets to invest in Germany would depend on unambivalent budget consolidation and a fall in the public sector's share of GDP.
If by mid-November at the latest the government failed to provide the markets with clear evidence of its fiscal consolidation intentions, a rise in long-term interest rates could not be ruled out.Reuse content