28 September 2021
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Changing tone to German politics

Social Democrats look to form coalition with Greens and a liberal party


By Emirates NBD Research

  • Germany’s Olaf Scholz's Social Democrats (SPD) came first in Sunday's national election, just ahead of the conservatives, and aims to lead a government for the first time since 2005 in a coalition with the Greens and the liberal Free Democrats (FDP). Scholz vowed to strengthen the European Union and form a three-way coalition government by Christmas to take over from Angela Merkel's conservatives. The SPD won 25.7% of the vote, up five percentage points from the 2017 federal election, ahead of the CDU/CSU conservative bloc on 24.1%, provisional results showed. The Greens came in with 14.8% and the FDP won 11.5%. Scholz, who served as finance minister in Merkel's outgoing grand coalition, said a government led by him would offer the United States continuity in transatlantic relations. While Scholz hopes to agree a coalition before Christmas, his conservative rival Armin Laschet said he could still try to form a government despite leading his CDU/CSU bloc to their worst ever national election result. Merkel will stay on in a caretaker role during the collation discussion that will set the future course of Germany.
  • US core capital goods orders (orders for non-defense capital goods excluding aircrafts), a closely watched proxy for business spending plans, rose 0.5% m/m last month. Data by the Commerce Department also revised July figures higher to show core capital goods orders gaining 0.3% m/m instead of the previously reported 0.1% m/m. Orders were up 16.4% y/y in August and are 18% above their pre-pandemic level. That is boosting manufacturing, which accounts for 11.9% of the economy, though a shortage of labour and raw materials such as semiconductors are making it harder for factories to fulfill orders. Orders for computers and electronic products rose 1.4% m/m. Order for electrical equipment, appliances, and components, as well as fabricated metal products also went up. But orders for machinery fell as did those for primary metals.  Shipments of core capital goods advanced 0.7% m/m last month after increasing 0.9% m/m in July. Core capital goods shipments are used to calculate equipment spending in the US government's GDP measurement. Business spending on equipment has seen four straight quarters of double-digit growth. Orders for durable goods (items ranging from toasters to aircraft that are meant to last three years or more) accelerated 1.8% m/m after climbing 0.5% m/m in July.
  • The European Central Bank's (ECB) President Christine Lagarde said on Monday that inflation in the euro zone could exceed the ECB’s already raised projections, but there are few signs of this already happening. Lagarde stuck to the official view that inflation will ease back below 2% next year but seemed to acknowledge growing concerns, including inside the central bank, that higher price growth might be here to stay. Euro zone inflation hit 3% in August, with the increase largely fueled by energy costs but the price of industrial goods and food rose too, reflecting supply inefficiencies after the pandemic. The ECB already started scaling back its pandemic emergency asset purchases and is expected to stop them in March. The central bank expects inflation of 2.2% this year, 1.7% in 2022 and 1.5% in 2023.

Today’s Economic Data and Events

16:00 EU ECB President Lagarde Speaks                                                                

18:00 US CB Consumer Confidence (Sep) Forecast 114.5

18:00 US Fed Chair Powell Testifies                        

Fixed Income

  • US Treasury yields continued to move higher amid the prospect of even higher inflation spurred on by rising energy costs. Officials from the Fed, including chair Jerome Powell, also indicated that the conditions in the US economy support the plan to start tapering of asset purchases in the near term. Yields on the 2yr UST moved up less than 1bp overnight to 0.2779% but have started trading today at more than 0.30%. On the 10yr, yields rose to as high as 1.51% overnight before moderating their move to settle at 1.4871%, up almost 4bps.
  • The political uncertainty around the German parliamentary election helped to put a cap on bund yields which close essentially unchanged overnight. While negotiations for a coalition government are now underway it may take several weeks or months before a cabinet is formed, interrupting the near-term flow for fiscal spending.
  • Emerging market bonds continued to unravel amid the jump in UST yields. A broad index of USD-denominated EM bonds fell 0.2% overnight while yields on Indian, South African and Turkish 10yr government all pushed higher.
  • Moody’s assigned Masdar an ‘A2’ rating with a stable outlook while APICORP has begun investor calls ahead of an issuance.


  • Rising yields and more certainty over tighter US monetary policy helped the dollar overnight with the DXY index edging up slightly. The greenback has also opened stronger in early trade today. The uncertain outcome of the German federal election will weigh on the near-term outlook for fiscal plans and is serving as a drag on the Euro. EURUSD sank to 1.1695, down 0.21%, as European markets opened with no clear winner in Germany’s vote. USDJPY added 0.2% in a similar fog of political uncertainty.
  • Despite the negative headlines surrounding the UK economy, with supply and logistic challenges affecting the near term outlook, GBPUSD managed to be a relative outperformer among major currency pairs, rising 0.14% to 1.3698.
  • Commodity currencies were higher across the board. USDCAD slipped by 0.2% to 1.2628 while AUD added 0.33% to 0.7286 and NZD edged marginally higher to 0.7017.


  • Risk appetite took a tentative step forward overnight with gains in European equity markets and mixed performance in the US. The S&P 500 fell 0.28% while the Nasdaq sank 0.5% overnight but the Dow managed a 0.2% gain. The EuroStoxx 50 index added 0.2% with a similar sized moved in the FTSE.
  • Asian markets have opened generally to the downside in trading today. Both the Nikkei and CSI are down, by 0.8% and 0.2% respectively while the Hang Seng is outperforming with a near 1% gain.
  • Local markets were decidedly weaker with the DFM index falling 0.5% and the ADX off by 0.3%. The Tadawul managed a gain of 0.1%, however.


  • Oil prices continue to push higher thanks to a tight market at present. Brent futures added 1.8% to USD 79.53/b and are encroaching on USD 80/b in early trade today while WTI rose nearly 2% to USD 75.43/b with further moves upward today. Natural gas continued to move higher overnight with gains in Henry Hub, LNG and NBP pricing.
  • Gold prices were flat on the close at USD 1,750/troy oz even as yields on 10yr USTs near 1.5%. Across the rest of the metals space the price action was mixed with aluminium dipping while copper and iron ore were higher.

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Written By


Emirates NBD Research Research Analyst

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