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Edward Bell - Commodity Analyst
Published Date: 28 March 2019
Dubai’s economy grew 1.9% in 2018, lower than our forecast of 2.8%. However, 2017 GDP growth was revised higher to 3.1% from 2.8% previously. The fastest growing sector was real estate services (7.0% y/y) followed by health and social work (5.3% y/y). The construction sector grew 4.5% y/y, the fastest rate of growth since 2008. Dubai’s largest sector – wholesale & retail trade – grew just 1.3% last year, a little faster than in 2017 but still slower than the growth recorded in 2013-2015. Our 2019 GDP growth forecast is under review, but we continue to expect growth to accelerate in 2019.
The Brexit saga marked time as parliament failed to find majority support for an alternative to the government’s withdrawal bill. UK prime minister Theresa May has apparently offered to resign in order for hardline Brexiters in the Conservative party to support her deal but that has yet to guarantee that her deal will be passed in parliament if it is again presented for a vote. With no alternative gaining support and no movement yet on the existing deal the risk of the UK leaving the EU on April 12th and reverting to WTO rules (the so called ‘no deal’ exit) is looming as a considerable risk. UK consumers are taking a cautious approach on spending as Brexit remains unresolved. The CBI reported a drop in monthly sales in March, their largest decline in 17 months.
The US trade deficit narrowed in January thanks to a drop in imports, a worrying sign for domestic consumption, along with a boost to exports thanks to soybean shipments to China. The total trade deficit with China hit USD 34.5bn, its smallest level since June 2018 as imports from China have fallen considerably. The aggregate trade balance narrowed to USD 51.1bn, below market expectations.
China’s premier Li Keqiang gave more indication of stimulus to help prop up the domestic economy in the form of lower real interest rates and borrowing costs. China’s authorities have so far been reticent to open the taps fully for stimulus to prevent an even more unsustainable increase in debt and have been trying to use indirect support for the economy.
Source: Emirates NBD Research, Bloomberg
Comments from the ECB president, Mario Draghi, sparked a slump in bund yields by suggesting that the bank could change its forward guidance to “reflect the new inflation outlook.” The ECB had already lowered its projections for 2019 and removed expectations that there will be any upward move in rates in the Eurozone this year and Draghi’s latest comments imply that negative rates appear here to stay. Bunds ended the day back in negative territory at a yield of -0.08% on 10yr maturities. Treasury yields fell in sympathy, closing down 4bps on the 10yr with a 5bps drop on the 2yr.
Moody’s affirmed its Aa2 rating on Abu Dhabi and kept the soverign on a stable outlook.
NZD was yesterdays worst performing major currency following the RBNZ’s monetary policy meeting. The central bank held interest rates unchanged at the record low of 1.75% but policy makers signalled that their next move in interest rates is likely to be a cut. Over the course of the day, NZDUSD fell by 1.59% to close at 0.67972. As we go to print, the price is currently 0.68081 and remains below the formerly supportive 50-day and 100-day moving averages (0.6828 and 0.6812 respectively). The daily close below these levels yesterday,, makes the cross vulnerable to further declines towards 0.6736, the 200-day moving average.
This mornings strongest perfoming currency is JPY which has strengthened as a results of the markets current risk off environment. With U.S. 10-year Treasury yields falling to the lowest level since December 2017, the yen has strengthened. As we go to print, USDJPY is trading 0.28% lower at 110.20.
Equities sold off in developed markets overnight as the drop in bond yields flashed more warning signs about the health of the global economy. The S&P 500 dipped by 0.46% while in Europe most indices were roughtly flat. Japanese indices are off sharply this morning.
The DFM was flat overnight while the Tadawul gained 1% and the Abu Dhabi exchange fell by 0.3%.
Oil prices dipped overnight thanks to an unexpected build in US crude stocks as reported by the EIA. WTI fell 0.9% to close at USD 59.41/b, still failing to end the day above USD 60/b, while Brent slipped by 0.2% to close at USD 67.83/b. Total US crude stocks rose 2.8m bbl last week although total inventories (including products) were roughly flat thanks to draws in gasoline and distillates.
The Dallas Fed released its survey of oil and gas conditions in Texas which provides some indication on the outlook for production from shale companies. Exploration and production companies have managed to bring down operating costs to USD 33/b for existing wells (compared with USD 35/b last year) while the breakeven for new drilling fell to USD 50/b, down from USD 52/b last year.