21 November 2017
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Chancellor Merkel open to new elections in Germany

British households are beginning to feel the pinch of higher inflation according to the IHS Markit Household Finance Index


By Emirates NBD Research


Angela Merkel’s efforts to form a three way government in Germany failed yesterday, putting her fourth term in doubt and raising the spectre of possible new elections. The news comes as the German economy growth outlook for 2017 look to be the strongest in 6 years, after Germany’s IFO institute lifted German forecast GDP this year to 2.3% from 1.9%. A consumer led upswing on record low unemployment, moderate inflation and low interest rates is lending support to an already robust export driven sector of the economy. Failure to form a government in Germany could have implications on issues ranging from Eurozone economic reforms to Brexit negotiations. Furthermore uncertainty on the outlook for promised fiscal stimulus by the next government could further cloud the outlook for Europe’s largest economy.

Federal Reserve Chair Janet Yellen said on Monday she would resign her seat on the Fed's Board of Governors once Jerome Powell is confirmed. In a letter to US President Donald Trump, Yellen vowed to "do my utmost to ensure a smooth transition" to Powell, who was nominated to succeed her by Trump early this month. President Trump will be able to appoint five of the board's seven potential members, filling four open seats alongside his sole board appointment to date of Randal Quarles as vice chair for supervision. Yellen who could have stayed on as Governor till 2024, credited with putting the economy on a firmer footing and steering monetary policy away from the firefighting mode that followed the 2007-2009 recession and financial crisis,

British households are beginning to feel the pinch of higher inflation according to the IHS Markit Household Finance Index. The index fell 43.4 in November from 43.8 in October, with respondents being their most pessimistic on their outlook for finances since June. The survey found the pace of spending growth by households slowed in November, on the back falling spending power as banks reining in their credit. Separately, Visa predicted a 0.1% fall in spending after adjusting for inflation during the Christmas period. This would be the first annual fall since 2012, in comparison to last year's increase of nearly 3%.  

German inflation higher but still moderate

Source: Bloomberg, Emirates NBD Research

Fixed Income

Treasuries closed lower as the curve continued to flatten despite political crisis in Germany and no headway in the US tax bill. The announcement by Janet Yellen that she will resign from the Fed also had no impact. Yields on the 2y USTs increased 3 bps to 1.75%, on 5y USTs by 4 bps to 2.09% and on 10y USTs by 2 bps to 2.36%.

Regional bonds is starting to see some buying interest come back. While the YTW on the Bloomberg Barclays GCC Credit and High Yield index remained flat at 3.71%, credit spreads tightened by 3 bps to 160 bps.

In terms of rating action, Moody’s downgraded Al Hilal Bank’s long term issuer rating to A2 from A1 and changed the outlook to stable from negative. The agency attributed the decline to deterioration in asset quality and coverage levels. There was no impact of the same on ALHILAL 5.5% perpetual which actually closed marginally higher at USD 101.50.


The dollar rallied yesterday as uncertainty abroad hurt other currencies and as US leading indicators exceeded expectations rising by 1.2% in October pushing US yields higher. In particular German political uncertainty helped EURUSD lower, reaching as low as 1.1730. USDJPY recovered as risk appetite improved on the stronger US data, while USDCAD was supported by softer oil prices.

Minutes from the RBA’s November meeting dampened the AUD as they suggested that the central bank is in no hurry to riase interest rates, citing ‘considerable uncertainty’ about when wage pressures might emerge.


Developed market equities closed higher at the start of the shortened week of trading as Congress took holiday break from tax talks. The S&P 500 index added +0.1%. European stocks appeared unfazed from political developments in Germany as the Euro Stoxx 600 index rallied +0.7%.

For regional equities, it was more of the same. The DFM index and the Tadawul declined -0.2% and -1.0% respectively. Volumes declined as well with average turnover nearly 25% lower than the last 1-month average.


Oil prices remained under pressure as political uncertainty in Germany led to USD strength and speculation about OPEC’s next move. It appears that most OPEC members are in favour of extending the supply cuts with Iranian oil minister echoing a similar sentiment. Both Brent and WTI prices declined -0.8% each.

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Emirates NBD Research Research Analyst

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