German Election Spotlights European Politics
Financial markets ended the week in a cautious mood. Big technology companies continued to support US share prices, particularly those tied to artificial intelligence, but investors remained wary of higher borrowing costs, richly valued shares, and mounting political uncertainty in Europe. European markets were the weaker spot, weighed down by slow growth, high energy prices, and government pressure to rein in spending. The Bank of England, meanwhile, held interest rates unchanged despite inflation persistently running above its 2% target.
Bond Markets in Focus
Bond markets were a major talking point this week. When bond yields rise, it typically becomes more expensive for governments, companies, and households to borrow — which in turn can make investors less willing to take on risk. In the UK, both the pound and government bonds weakened as investors weighed whether the latest 3.1% inflation reading might prove more persistent than hoped.
Germany: A Political Shock With Market Implications
The week’s biggest political story was the German state election result in Mecklenburg-Western Pomerania. The CDU — Chancellor Friedrich Merz’s party — fell to roughly 4.9% of the vote, below the 5% threshold normally required to win seats in the state parliament, while the far-right AfD performed strongly. This matters to investors well beyond German borders: Germany is Europe’s largest economy, and the CDU has long been viewed as a steady, pro-business, pro-Europe anchor. A weak result raises real questions about the strength of the governing coalition, the ease of passing reforms, and Germany’s ability to continue leading Europe on issues such as defence, energy, and public spending.
The market impact is unlikely to show up as a single sharp move. It is more likely to surface gradually — investors demanding a higher return to lend to European governments, doubts creeping in about whether Germany is insulated from the political fragmentation seen elsewhere in Europe, and German equities becoming more sensitive to shifts in the status quo, energy costs, or infrastructure spending plans.
France adds a further layer of complexity. Its government finances are watched closely, and there remains a possibility that a future French election could bring in a right-wing president. That outcome would not necessarily be negative for markets, but investors would want clarity on spending plans, the relationship with the EU, and the stability of the rules governing both. Tactically, the portfolios have remained underweight Europe, and recent events are unlikely to change that view.
AI Spending Remains a Central Theme
The scale of capital being deployed into artificial intelligence continues to dominate investor conversations. Nvidia remains a key example: beyond selling the chips that power AI systems, reports this month suggest its investments in other companies have risen to around $99 billion — meaning Nvidia is increasingly helping to fund the very companies that buy its chips.
Other major technology names, including Amazon, Alphabet, Meta, and Microsoft, are also directing vast sums toward data centres, chips, electricity supply, and cloud computing. That spending has supported share prices across chipmakers, power companies, and infrastructure businesses. The risk, however, is that if interest rates stay elevated, investors may increasingly question whether this spending translates into durable profits or an adequate return on the capital employed.
What to Watch This Week
The most significant economic releases this week will be the September flash Purchasing Managers’ Indices (PMIs) for Germany, the eurozone, the UK, and the US — early indicators of whether business activity is accelerating or slowing. US durable-goods orders and consumer confidence data are also worth watching, alongside central bank speeches across the US, Europe, and the UK, which could move markets further if officials signal that rates need to stay higher for longer.
The broader message this week is that politics, interest rates, and AI are all pulling in the same direction of importance. Higher rates raise the bar for governments to appear in control of their finances, while messy politics makes that harder to demonstrate. AI remains a powerful growth story, but markets are increasingly reliant on a small number of large technology companies, and the close link between European equities and EU politics leaves them more exposed to volatility. The German election result is unlikely to trigger a crisis on its own, but it adds to investor unease about Europe at a time when France is already under scrutiny.
Chart of the Week
The results from Berlin and Mecklenburg-Western Pomerania illustrate the scale of the shift: the AfD topped the poll in Mecklenburg-Western Pomerania at 38.3%, while the CDU slipped to just 4.9% in the same state — underscoring how quickly the political map is changing in parts of Germany.
This Week in the Portfolios
What Happened?
Returns over the week were led by precious metals, US large-cap equities, and selected technology exposure, with energy commodities and emerging markets also contributing in the higher-risk funds. Gold was the largest positive contributor in the Conservative Fund, while in the Balanced Fund, Silver was the strongest contributor, followed by US Large Cap, Gold, Global Technology, and Energy Commodities. In the Growth Fund, Silver again led, with Energy Commodities, emerging markets, China, Japan, US Large Cap, and Global Technology all adding positively. The main detractors were concentrated in Global Mining, Infrastructure, Europe, and Global Value, which weighed more heavily on the Balanced and Growth Funds.
Why We’re Positioned This Way
The portfolios remain positioned to favour a blend of defensive real assets, selective equity growth exposure, and liquidity. Precious metals continue to provide diversification against political uncertainty, sticky inflation, and pressure in bond markets, while US large-cap and technology exposure remains important given that earnings momentum linked to AI and cloud infrastructure is still a key support for global equities — even as valuations demand discipline. The higher allocations to commodities, Japan, and emerging markets in the Balanced and Growth Funds reflect a willingness to participate where the growth and inflation backdrop may offer better medium-term opportunities, while the Conservative Fund retains a larger allocation to absolute return, cash proxy, and corporate bonds to moderate volatility.
What TEAM Is Doing
TEAM continues to keep the portfolios diversified and risk-aware rather than relying on any single narrow market theme. Exposure is being maintained to areas that have contributed positively — precious metals, US large caps, technology, and selected commodities — while weaker areas are being monitored closely. The negative contribution from Global Mining, Infrastructure, Europe, and Global Value is being assessed in the context of the wider market backdrop rather than treated as a single-week signal, allowing strategic exposure to be retained where the long-term case remains intact.
What We’re Watching
Several factors are being monitored closely over the coming weeks: whether central banks push back further on expectations for interest-rate cuts, given that higher yields could pressure both bonds and equity valuations; whether Europe’s political uncertainty begins to weigh more materially on investor confidence, particularly given the existing underweight position; whether AI-related capital spending continues to support earnings expectations or whether investors start to question the returns on that investment; and whether the recent strength in precious metals and commodities broadens into a more sustained trend or remains a defensive response to uncertainty.
At NEBA Financial Solutions, we continue to track these developments closely on behalf of our clients, helping ensure portfolios remain appropriately positioned as Europe’s political landscape and the broader rate environment evolve.
This article is based on insights and analysis provided by David Gorman of TEAM.
