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Khatija Haque - Head of Research & Chief Economist
Edward Bell - Senior Director, Market Economics
Daniel Richards - MENA Economist
Jamal Mattar - Research Analyst
Published Date: 01 July 2020
Dubai World paid off USD 8.2bn in debt outstanding that had been due only in September 2022. The move draws a line under Dubai GREs' debt restructuring after the Global Financial Crisis. Dubai World used its own funds as well as a USD 3bn loan from Dubai Islamic Bank to make the payment. Separately, the Dubai Statistics Centre said the economy contracted -3.5% y/y in Q1 2020 compared with growth of 2.2% in the same period last year. The key sectors of wholesale & retail trade, transport & storage contracted in the first quarter, and the contraction likely worsened in Q2 as most the economy was shutdown for much of April and only partially reopened in May. As a result, it is likely that many businesses may be looking to restructure some of their obligations in the next 6-12 months.
Fed Chairman Jerome Powell told congress that the Fed could lower the threshold to allow more small and medium sized companies to access central bank funding but acknowlegdged that making very small loans would be logistically difficult for the Fed. At the moment, the minimum loan size is USD 250k. He stressed the need to contain the pandemic in the US in order to turn the recent improvement in economic activity into a more sustained recovery. Separately, Dr Fauci warned that infection rates in the US could rise to 100k per day – more than double where they are now – if behaviours don’t change.
UK GDP for Q1 was revised lower to -2.2% q/q (-1.7% y/y) from -2.0% (-1.6%) in the first estimate. Boris Johnson’s “New Deal” speech essentially brought forward plegdged infrastructure spending of GBP 5bn into this year, to boost growth. More details on the plan will be announced by the Chancellor on 8 July.
The Caixin China manufacturing PMI, which focuses more on smaller private businesses than the official PMI, came in higher than expected at 51.2 in June, up from 50.7 in May. The improvement in new orders was attributed to better external conditions, as economies around the world eased restrictions, boosting exports from China.
The ongoing collapse of the Lebanese pound as the country struggles with an acute balance of payments crisis has prompted the authorities to raise the price of subsidized bread for the first time in eight years, from LBP 1,500 to LBP 2,000. Given that the currency is trading around LBP 8,000/USD on the parallel market, compared to the longstanding official rate of LBP 1,507/USD, more such measures are likely, which will further exacerbate social unrest. Lebanon is in discussions with the IMF as it tries to find a route through its crisis, but these had a further setback this week as a second negotiator quit, complaining about vested interests undermining attempts at a resolution.
Source: Bloomberg, Emirates NBD Research
Treasuries ended the quarter on a soft note with yields on the 10yr rising by 3bps and the curve steepening across the back end. Throughout the quarter yields on the 10yr had a range of motion of around 33bps, hitting a peak of 0.89% in early June before sliding back to 0.66% at month end as concerns over the resurgence of Covid-19 took hold.
EM bonds had a strong second quarter, gaining nearly 12% in line with a recovery in oil prices. Local UAE bonds caught part of that rally; the Bloomberg USD UAE index rallied 9% over Q2.
Jordan has issued dollar-denominated debt for the first time since 2017. The double-tranche issuance consisted of a five-year USD 500mn Eurobond at 4.95% and a 10-year USD 1.25bn at 5.85%. According to the Ministry of Finance, the issuance was 6.25 times oversubscribed, and was at lower cost compared to the last Eurobond issuance which the Jordanian authorities cited as testament to their progress in containing the coronavirus pandemic. A new deal signed with the IMF in March will likely have also reassured investors that Jordan remains committed to its necessary structural reforms.
Tuesday saw the dollar initially continue its positive form after Monday, briefly touching the 97.802 mark before meeting resistance and ultimately failing to preserve its gains, resulting in a decline to 97.330. USDJPY experienced some erratic movement during the day and looked to gain traction in the evening and this morning, but has fallen to 107.70 in early trade today.
The euro slumped in the afternoon, decreasing below the 1.1200 level, but has recuperated these losses and currently trades just below Monday's closing price at 1.1240. Sterling rallied to 1.2385 this morning off the back of end of month flows and some improvement in risk appetite. The AUD and NZD both recorded modest gains, trading at 0.6910 and 0.6460 respectively.
Equities rallied into the final day of the quarter with the S&P posting gains of more than 1.5% with strong performance on the NASDAQ and Dow as well. In Europe equities were more mixed with the FTSE losing ground (0.9%) while the Dax was up by around 0.6%. Trading in Asia is mixed today with the Nikkei off slightly and the Shanghai gaining 0.6% while the Hang Seng is closed for a public holiday.
Regional markets were mixed with both the DFM (-0.7%) and Tadawul (-0.9%) declining while the Abu Dhabi market managed to reverse its prior day’s losses and gained 0.24%.
Oil futures rounded off an extremely volatile second quarter with a day of declines. Both Brent and WTI futures slipped by more than 1% to settle at USD 41.15/b and USD 39.27/b respectively. All told, however, Brent gained 81% in the quarter and was outshone by WTI adding almost 92%! However, Q2 2020 will be likely most remembered for the unprecedented demand shock and record OPEC+ adjustment as well as oil prices recording a negative close for the first time.
Most of the gains came early in the quarter with prices in June holding to a narrow range for both Brent and WTI. Anxiety over a possible resurgence of Covid-19 cases will keep a handbrake on rallies even as signs of rebalancing persist. The API reported a sizeable drop (8.2m bbl) in US crude stocks last week as the market waits for official EIA data out later today.
Dubai announces additional fiscal support
UK government pledges more support
European Commission downgrades forecasts
EU retail sales bounce back