Merz and Trump hold “good” phone call, German Chancellor says

German Chancellor Friedrich Merz said the coalition must improve communication and deliver a reform package on tax, the labour market, pensions and red tape before the summer recess, amid very weak approval ratings of 13% for the government and 16% for Merz. He also reiterated criticism of the US while confirming a "good" phone call with Donald Trump in which they discussed Iran, the Strait of Hormuz, Ukraine and NATO coordination. The article is mainly political commentary with limited direct market implications, though it touches on fiscal reform and geopolitical issues.

Analysis

The near-term market signal is not about policy content, but about execution risk. A coalition showing weak internal discipline tends to produce “announce first, implement later” dynamics, which is bearish for domestic cyclicals that need credible reform timing: German banks, construction, and small-cap industrials typically re-rate only when tax/labor changes move from rhetoric to draft law. Until then, the earnings uplift from lower regulation remains a deferred catalyst, while bond markets can still benefit modestly from any pension reform that extends duration of public liabilities.

The bigger second-order effect is on German risk premia versus European peers. If investors conclude the government cannot convert its agenda into enforceable legislation before the summer recess, Germany keeps losing relative policy credibility just as the U.S. and France trade on stronger executive signaling. That argues for caution on domestically levered German mid-caps and for relative long exposure to euro area exporters with less policy dependence, especially names with non-German revenue and less wage sensitivity.

The transatlantic signaling matters more than the headline suggests. Public friction with Washington raises the odds that defense and industrial policy become more explicitly Europeanized over the next 3-12 months, which is constructive for EU defense primes, ammunition, and infrastructure electrification supply chains. If Berlin is forced to compensate for weaker U.S. alignment, the beneficiaries are firms tied to NATO rearmament and German fiscal outlays, not broad domestic consumption.

Contrarian angle: consensus may overestimate how much approval ratings matter for asset prices in the next quarter. What matters is whether the government can pass even one visible reform before the recess; a single credible bill would likely snap back sentiment faster than polls imply. So this is a low-conviction bearish macro setup today, but a high beta trade on legislative confirmation in the next 4-8 weeks.

Key Decisions for Investors

• Short DAX domestic-cyclical basket vs long EuroStoxx exporters for 4-8 weeks; target 3-5% relative underperformance if reform gridlock persists, stop if coalition delivers a credible tax/labor bill.
• Go long European defense exposure via RHM.DE / HAG.DE or a basket, 3-6 month horizon; expect policy support and procurement urgency to offset weak German sentiment, with upside skew if EU strategic autonomy accelerates.
• Avoid or underweight German banks with high domestic loan books for the next 1-2 months; the trade only works if regulation and labor reforms translate into faster credit growth, which currently looks delayed.
• Pair long infrastructure/electrification suppliers with short German small-cap industrials that need domestic demand improvement; 2-4 month horizon, best if the summer recess passes without legislative traction.
• Use a tactical long in German Bund futures on any failed coalition headline over the next 2-6 weeks; weak policy credibility can widen risk-off spreads briefly, but take profits quickly because downside is limited if reforms later reappear.