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Aditya Pugalia - Director, Financial Markets Research
Published Date: 04 September 2019
The gridlock within the UK Parliament over Brexit worsened further overnight. In a vote which was passed with help of dissenters from the ruling Conservative Party, the Parliament took control of the legislative business. This effectively allows a second vote later today which will force the UK prime Minister to seek an extension to the 31 October 2019 Brexit date should a deal be not reached. In response, the Prime Minister Boris Johnson has indicated that he will possibly call for a general election. However, it is far from certain that he will get support from enough members of the Parliament to dissolve the house until the bill aimed to avoid a no-deal Brexit is passed.
The ISM manufacturing data in the US moved into contraction territory for the first time since September 2016. The headline reading of 49.1 was much weaker than the consensus expectation. Amid sub-components, the new export order index dropped to a decade-low reading of 43.3. The data when looked at in the context of the ongoing trade confrontation between the US and China suggest that the idea of tariffs on Chinese goods boosting US manufacturing is not working at the moment. In the short term it provides another reason for investors to expect a 25bps rate cut when the Federal Reserve meets later this month.
Australia’s economy expanded at the slowest pace in a decade. The GDP rose 0.5% q/q and 1.4% y/y in Q2 2019. The growth was supported by increased government spending on infrastructure and increased iron-ore exports. The data came after the Reserve Bank of Australia left its official cash rate unchanged at 1.00%. However, the central bank reiterated from its last statement that ‘it is reasonable to expect that an extended period of low interest rate will be required to make progress in reducing unemployment and achieve more assured progress towards the inflation target’.
Source: Emirates NBD Research
Treasuries closed higher as weak ISM manufacturing data weighed on investor sentiment and reinforced expectations of a dovish Federal Reserve response when it meets later this month. The curve steepened with yields on the 2y UST, 5y UST and 10y UST closing at 1.45% (-5 bps), 1.32% (-6 bps) and 1.45% (-4 bps) respectively.
Gilts in the UK continue to move higher as the ongoing process in the Parliament brings new uncertainty and possibly a general election. Yields on the 10y Gilts dropped -1bp to 0.40%.
Regional bonds continue to move in line with benchmark yields. The YTW on Bloomberg Barclays GCC Credit and High Yield index dropped -4 bps to 3.03% and credit spreads tightened 1bp to 157 bps. The recent weakness in oil prices seem to have a limited impact on regional bonds.
S&P affirmed it’s a- rating on Doha Insurance Group. The outlook remains stable. Elsewhere, Aluminium Bahrain is raising USD 1.5bn through a syndicated sever-year loan to lower the cost of existing debt.
AUD was Tuesday’s top performer in the aftermath of the RBA meeting. Policy makers at the central bank left interest rates at a record low of 1.00%, in line with expectations and repeated that they expect interest rates to remain low for longer. Despite this, AUDUSD rose 0.65% to close at 0.67597. This morning, AUDUSD has risen a further 0.28% to reach 0.67779 following the release of Q2 2019 GDP data which, in line with expectations, showed 0.5% q/q growth, matching the upwardly revised figure (from 0.4%) during the first quarter.
Developed market equities closed lower amid reports of lack of traction between the US and China to continue trade talks. Weak economic data from the US also weighed on investor sentiment. The S&P 500 index and the Euro Stoxx 600 index lost -0.7% and -0.2% respectively.
Regional equities closed mixed with the DFM index losing -0.5% and the Qatar Exchange gaining +0.3%. The Tadawul declined -0.6% as adjustment following completion of inclusion in the MSCI EM index continues. On the DFM, it appeared to be a case of investors locking in their recent gains. Emaar Properties and Dubai Islamic Bank lost -2.3% and -0.8% respectively.
Oil prices held onto thir losses following a surprise contraction in US manufacturing data and lack of progress on US-China trade talk dates. Brent oil prices dropped -0.7%.
Gold benefitted as a result of the ongoing uncertainty and risk-off mood to gain +1.2%. The spot prices closed at USD 1547 per ounce.
Markets to focus on ECB policy meeting
UK July GDP firmer than expected
US employment data weaker than expected
FX Week: Volatility continues