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Daniel Marc Richards - MENA Economist
Published Date: 17 December 2018
UK Prime Minister Theresa May remains under pressure as EU leaders declined to give her any particular reassurances with regards the backstop component of her Brexit deal on Friday. Reports suggest that she threatened to re-table the parliamentary ‘meaningful vote’ cancelled last week for being unwinnable in a bid to force their hand into making concessions, but to no avail. There remains great uncertainty regarding the outcome of Brexit, with increasing noise around the possibility of a second referendum, even within PM May’s cabinet. In this environment, it remains highly likely that the BoE will maintain interest rates at 0.75% at its meeting on Thursday, having voted unanimously to hold steady at the last meeting in November. While stronger-than-expected growth in pay and other robust data points might otherwise prompt a hike, Brexit-related uncertainties will likely preclude this.
At its Thursday meeting, the ECB declared that it would in January end its asset-purchasing programme, in place since 2015. There was no new guidance on when the bank’s benchmark interest rate would be raised from 0.0%, with the statement maintaining that it would remain unchanged ‘at least through the summer of 2019.’ The halt to asset purchases comes despite mounting threats to economic growth in the Eurozone; ongoing protests in France and Italian budget defiance, alongside trade concerns, are some of the more prominent risks facing the bloc, and these are becoming manifest in the data. Eurozone PMI figures released at the close of the week fell short of expectations, raising concerns regarding the underlying health of the bloc’s economy. The manufacturing index came in at 51.4 in November, down from 51.8 the previous month and missing consensus expectations for a repetition of this score. The services PMI also weakened, also scoring 51.4, down from 53.4 in October.
Turkey’s central bank held its benchmark one-week repo rate steady at 24.0% on Thursday, allaying investor fears that lower-than-anticipated inflation in November might spur the MPC to make a premature cut. The communiqué noted that while inflation had fallen, ‘risks to price stability continue to prevail’, and pledged to tighten monetary policy further if necessary. This is likely positive for lira stability, and while the high interest rate will weigh on growth in the coming quarters, it should contribute to the continued economic rebalancing ongoing in Turkey.
Source: Bloomberg, Emirates NBD Research
Fixed income markets will be looking ahead to the FOMC meeting on Wednesday when the Fed is expected to raise rates by another 25bps. Based on the latest data coming out of the US there are no barriers to the Fed moving again: retail sales in the US rose 0.9% in November. However, yields on 10yr USTs dipped by 2bps on Friday as a major sell off in equity markets likely weighed on sentiment and will make investors second guess the trajectory for rates next year. The 2yr-10yr spread ended the week at around 16bps.
Treasury markets aren’t showing any immediate concern that the US government will shutdown at the end of the week with short term treasuries usually showing signs of distress.
Fitch affirmed its ‘BB’ rating on Turkey and kept the outlook on negative and warned the country would face a long period of subpar growth and high inflation. Moody’s revised its outlook on Lebanon to negative and affirmed its rating of B3. The agency said both domestic and international political tensions are weighing on the country whose forex reserves are ‘less ample’ when trying to manage financial stability.
Over the last week, a decline of 0.65% took EURUSD to 1.1305 after having reached a new December low of 1.1270 during the week. Despite two attempts to break above the 50-day moving average (1.1397) at the start of the week, EURUSD was unable to hold onto gains and sustain the breaks and this level now provides resistance. Analysis of the daily candle chart reveals that the price has been in a downtrend since September 26th 2018, and while the daily close remains below the 1.1380 level, this trend remains intact.
After a volatile week of trading between the 1.25-1.27 handles, GBPUSD closed at 1.2584 on Friday, realizing a weekly decline of 1.12%. Also of noteworthy, the price reached a new 20-month low of 1.2478 on Wednesday. Technical analysis reveals that further downside risks may emerge. The 14-day RSI is bearish in momentum and shows that on a daily basis, more selling may lie ahead. In addition, following six weeks of declines, the weekly close remains below the 100-week moving average. These observations indicate that further downside is likely in the short and medium term.
Developed equity markets turned in a poor performance at the end of last week. In the U.S. the S&P500 fell by 1.91%, while the Nasdaq fell 2.26% and the Dow Jones retreated 2.02%. European counterparts shared similar days with the Euro Stoxx declining 0.63% while the DAX fell by 0.54%.
This morning Asian equities are having mixed performances. The Nikkei is currently 0.71% higher while the Shanghai Composite is flat.
Oil markets resumed their downward trend last week with both Brent and WTI falling over the five days. Brent futures fell 2.2% to close at USD 60.28/b while WTI gave up 2.7% to end the week at USD 51.20/b. Both benchmarks are now below the levels they recorded ahead of the OPEC+ decision at the start of December to cut production by 1.2m b/d. With markets winding down for the end of the year we expect to see liquidity waning from the market and potentially ramping up volatility.
Investors in crude markets remain in evacuation mode. Net length in WTI fell a second week running thanks to an increase in short positions while positioning on Brent was a little more balanced this week. Nevertheless investors have essentially abandoned long crude positions in the last month and a half. WTI net length represents just 3.4% of total open interest, its lowest level since August 2016. With so much cash out of the market, the market will be prone to sharp moves off of limited headlines. In the US, the drilling rig count fell by four rigs last week, the second weekly decline in a row.
Daily Outlook : Brexit weighs on UK growth
Trade war rhetoric roiling markets