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Mohammed Al Tajir - Manager, FX Analytics and Product Development
Published Date: 18 September 2018
Markets had a cautious tone on Monday as investors pondered the latest threats by President Trump to implement additional tariffs on Chinese goods. Overnight Trump has said he will put a 10% tariff on USD200bn of Chinese goods next week (to take effect on 24 September) and raise them again to 25% in 2019. If China retaliates he will pursue tariffs on another USD267bn of Chinese goods. Yesterday the Wall Street Journal reported that China may skip the scheduled trade talks with the U.S. scheduled to take place on the 27-28 of this month.
Warnings about the consequences of a no-deal Brexit scenario are getting louder, this time with the IMF saying that the UK leaving the EU without a deal would entail ‘substantial costs’ and could in ‘a reasonably short order mean a reduction in the size of the UK economy’. The Fund also said that the challenges in getting a deal done in the remaining time available were ‘daunting’. The IMF of course has history on this subject, making a very pessimistic forecast ahead of the referendum in 2016 which so far has not come to fruition, with the UK economy since the referendum actually performing quite well.
The INR has been in constant focus since the start of Q3 2018. After seeing the currency against USD drop to its lowest level last week, the government announced few measures over the weekend to slow the pace of decline. The measures included curbs on certain imports, and reiterating a commitment to fiscal deficit target among other things, but the announcement had no visible impact with USDINR dropping to 72.50. However, in yet another attempt to show confidence in the economic fundamentals and reinforce its commitment to reforms, the Indian government has proposed a three way merger of state-owned Dena Bank, Bank of Baroda and Vijaya Bank to create India’s third largest bank. While the decision and logic behind it makes sense, the timing appears to be aimed at changing the narrative.
Source: Bloomberg, Emirates NBD Research
US Treasuries traded in a tight range as investors prepared for a potential after-market announcement from the US on trade with China. Yields on the 2y UST, 5y UST and 10y UST closed at 2.77% (flat), 2.89% (-1 bp), 2.99% (flat) respectively.
Regional bonds, too, trade in a tight range. The YTW on the Bloomberg Barclays GCC Credit and High Yield index remained flat at 4.48% as did credit spreads at 163 bps.
The primary market pipeline continues to grow. According to reports, Emaar Properties has hired banks for a possible sukuk issuance. Similarly, the recently formed Aldar’s real estate investment unit is also looking to issue a sukuk.
Despite the IMF’s warnings regarding the consequences of a “no-deal” Brexit, GBPUSD posted a 0.69% gain yesterday to close at 1.3157 as it continued to climb above the 100-week moving average (1.3081) broken on Friday. As we go to print, the cross currently trades at 1.3160, not far from the 100-day moving average of 1.3169. A break and daily close above this level will is likely to be followed by a further climb towards the 1.3320 level, not far from the 38.2% one-year Fibonacci retracement.
Developed market equities closed mixed. A pre-announcement by Donald Trump about an impending announcement on US-China trade after the close led US equities lower during regular trading hours. The S&P 500 index dropped -0.6%. The Euro Stoxx 600 index closed +0.1%.
The Tadawul (+1.9%) was a notable exception in what was another weak day of trading for regional equities. Weak investor sentiment and continued weakness in emerging markets weighed on regional equities. The Tadawul was led higher by strength in banking sector stocks with NCB and Samba adding +7.2% and +5.8% respectively.
Elsewhere, the EGX 30 index dropped a further -0.7% to close at its lowest level in 2018. The decline follows a court order for arrest of former President Hosni Mubarak’s sons on charges of stock price manipulation.
Oil markets started the week on a slightly softer footing with few fundamental catalysts to affect the market. The imposition of additional US tariffs on Chinese goods is weighing on commodities this morning with both Brent and WTI extending yesterday’s losses. Russia’s energy minister has discussed further cooperation with OPEC countries, effectively sealing the country in as an unofficial additional member. He also indicated that Russia was prepared to cooperate with the US on oil markets although antitrust rules and infrastructure constraints will prohibit any coordinated production action by US companies.
The EIA is projecting output from shale basins to continue rising in October, hitting 7.6m b/d out of a total of roughly 11m b/d of US production. The Permian basin in Texas will be the centre of shale production but the closely followed Dallas Fed survey, to be released at the start of October, will give a better sense of how aggressive companies there are planning to expand production.
February Monthly Insights
USD declines on renewed risk appetite
Expectations for higher U.S. rates ease
OPEC production: exposed