DAX FLASH: DAX Reduces Losses - Merz Successful in Second Round of Voting

The German stock market exhaled a collective sigh of relief on May 6, 2025, as Friedrich Merz’s narrow victory in the second round of voting to become chancellor averted a political crisis that had sent the DAX tumbling earlier in the day. After a historic first-round defeat—Germany’s first postwar chancellor candidate to fail to secure a majority—Merz’s coalition scrambled to secure the required 316 votes in the second round, ultimately prevailing 325 to 289. The result stabilized investor sentiment, though lingering risks to Germany’s economic and geopolitical future remain.

The Political Jolt and Market Volatility

Merz’s first-round failure sent shockwaves through financial markets. With only 310 votes in the initial tally—6 short of the threshold—the DAX plummeted 1.8% at one point, wiping €27 billion off its value. Investors feared a prolonged political vacuum, with Germany’s 14-day window to resolve the impasse threatening to delay critical economic reforms and deepen uncertainty.

The shows the market’s initial panic before stabilizing. By the close, the index had pared its losses to 1.5%, ending at 22,924 points—a stark contrast to its nine-day winning streak before the vote.

Sector-Specific Pain and Defensive Gains

The sell-off was uneven. Industrial stocks bore the brunt, with defense contractors like Rheinmetall AG (-2%) and automotive giants like Porsche AG (-2.5%) leading the decline. These sectors, reliant on German government spending and export-driven growth, faced immediate doubts about Merz’s ability to push through his agenda, including a €500 billion infrastructure plan and defense spending reforms.

Meanwhile, defensive stocks like Fresenius Medical Care (+3.8%) and Symrise (+0.2%) outperformed, insulated by their non-cyclical business models. The highlights this divergence, with Siemens—a bellwether for industrial health—dropping 2.5% while Fresenius surged.

Political Fragility and Economic Risks

Merz’s razor-thin victory masks deeper vulnerabilities. His coalition holds just a 12-seat majority, with internal dissent likely to persist. The SPD, Merz’s junior partner, saw 18 MPs withhold votes in the first round—a rebellion that hints at future friction over fiscal discipline and social spending.

Economically, Germany faces a stagnant growth outlook, with zero GDP growth projected for 2025 and U.S. tariffs threatening key exports. Defense spending, now critical to modernizing Germany’s military, faces hurdles in a fractured coalition. The show yields rising to 2.54%—the highest since mid-April—as investors priced in political risk.

Expert Analysis: A Fragile Calm

Analysts warn that Merz’s victory is far from a “green light” for investors. “The DAX’s rebound is relief-driven, not confidence-driven,” said Holger Zschäpitz of Welt, noting that Merz’s unpopularity (38% approval) and the far-right AfD’s 20.8% electoral support threaten policy cohesion.

Daniel Lacalle of Tressis added, “Markets corrected because politicians decided to keep everything unchanged. Merz’s agenda must prove its worth to stabilize growth.”

Conclusion: A Narrow Path Forward

Merz’s second-round victory halted Germany’s political freefall, but the DAX’s lingering losses underscore unresolved risks. The index closed 1.5% lower, reflecting skepticism about his coalition’s ability to navigate economic stagnation, far-right pressures, and U.S.-Europe trade tensions.

Long-term recovery hinges on Merz delivering on his €500 billion infrastructure plan, boosting defense spending to 2% of GDP, and stabilizing ties with a Trump-led U.S. While the immediate crisis is averted, investors should monitor the for signs of sustained stability. Until then, Germany’s stock market remains a cautionary tale of political fragility in a volatile world.