Germany's election might be over, and the country's new political course off to a familiar start, but the country's stocks haven't shown any sign of stability over the past week. The German DAX (^DAX) tilted wildly over the course of the last five days, jolting between losses and gains before settling in at the end of the week with modest losses.
Europe's strongest economy looks good at home with positive economic data in hand, but shudders from the U.S. and Italy have unnerved investors recently. Let's check in on what you need to know from across the Atlantic.
Stability in hand... but will markets rise?
Let's start off with the election's aftermath. German Chancellor Angela Merkel will need to form a new coalition government after her Christian Democratic Party won a plurality in Germany's Bundestag. Merkel said she doesn't anticipate German policy toward Europe's reconstruction following the financial crisis to change, a refreshing opinion for investors counting on stability from Europe's top economy. While Merkel conceded that she's willing to negotiate with her likely coalition partners, the Social Democrats, on issues such as a financial-transaction tax and other potential reforms, it's not likely that the new government will shake up the country's path ahead.
That's good news in light of how well Germany has weathered the recession that some leading European nations still find themselves locked into. Germany's preliminary composite Purchasing Managers Index, composed by Markit, showed the country's manufacturing and service sectors tracking up to a reading of 52.1 for September. That's ahead of economist projections, and slightly ahead of the 51.5 mark hit in August, where any reading above a 50 indicates expansion. Manufacturing and services make up a majority of Germany's GDP, and their rebound helped the country's economy grow 0.7% in the most recent quarter after the final quarter of 2012 saw Germany's GDP fall. Continued growth will keep the country's markets and stocks on a stable, solid foundation of growth.
However, international events could shake up Germany's hopeful outlook. The country is reliant on trade for a large part of its economy, particularly with China, the EU, and the U.S. The latter two have given German investors headaches this week: Italy kicked things off, as the government of the EU's third-largest economy is facing a fracture of its governing coalition. Meanwhile, America's budget battle has shaken up the U.S.'s future. While the budget battle isn't expected to have a dramatic impact on the America's economy if the government shuts down, it's causing Germany and investors to lose confidence in the U.S. government's ability to act -- and a failure to raise the debt ceiling later this year could slam German exports as a consequence from more serious American economic fallout.
Unfortunately, there's not a lot investors can do in light of political battles. There's not much Germany can do, either, but continue to approach Europe with the hand that's worked so far, and helped its economy battle back from the recession. The long-term approach to the country's markets is as important as ever with the situation in flux.
Fortunately, the aforementioned growth in services has kept some German stocks rolling higher. Adidas (ADDYY -0.11%) shares have been rising in Europe this week, and the German sportswear leader received a huge boost from its top rival. Nike (NKE -0.74%) reported its European sales soared in the fiscal first quarter, with Western European revenue climbing 8%, as Central and Eastern European sales jumped 10%. If Adidas can report similar growth from the continent, it'll help offset a poor outlook from the company. Adidas slashed its full-year sales outlook in August, in part due to European weakness: The firm's Western Europe sales dropped 11% in the second quarter. A bump would do wonders for cautious investors.
Some German leaders are facing trouble despite the economy's resilience, however. Deustche Bank's (DB 8.74%) co-CEO Anshu Jain cautioned this week that the firm's debt-trading revenue will fall substantially this quarter, as banks across the financial industry dampen their market revenue projections through September. Deutsche Bank has worked hard to reduce its risk recently, but Jain noted that such moves also would weigh on revenue for the quarter. The bank's stock has surged in the past six months, with shares up more than 18%, but Deutsche Bank's still dealing with litigation issues and Europe's slumbering economy.
