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Anita Yadav - Head of Fixed Income Research
Published Date: 11 April 2019
The minutes from the March FOMC meeting contained no big surprises and reflected a fair amount of uncertainty about the future direction of interest rates. Members noted that a number of uncertainties bearing on the U.S. and global economic outlook still awaited resolution and that some time would be needed to assess how economic growth would evolve in subsequent quarters. In terms of data, headline CPI in March increased to 1.9% from previous month’s 1.5% mainly due to higher gasoline prices. Core inflation actually reduced from 2.1% to 2.0%, very much validating the Fed’s wait and see approach. Elsewhere, Treasury Secretary Mnuchin said that the US and China have agreed on the trade deal enforcement.
The EU rejected the UK’s request to extend Brexit until June 30, citing insufficient time to achieve a successful outcome. Instead, the EU has agreed to extend the Brexit until October 31 this year. A review of progress is to be held in June. Prime Minister, Theresa May, now needs to sell the extension in parliament. Though politics is in chaos, the economy in the UK seems to be doing well. Initial estimate of GDP showed 0.3% growth in February. On annualized basis this would reflect growth of 2% in 2019, better than market expectation of 1.5% and IMF’s forecast of 1.2%. There may be an element of businesses front-loading imports or manufacturing ahead of Brexit, however, overall activity breakup reflects that the economy is well placed to cope with whatever the Brexit saga brings.
At the ECB meeting yesterday, President Dragi signaled growing concerns about the persistence of Euro-area weekness and confirmed that the ECB will consider if negative rates need mitigating. That may be a hint that the Governing Council sees rates staying lower for longer than its forward guidance currently suggests. No further details were provided about the TLTRO which will start in September.
As per media reports, shareholders of Invest Bank approved a proposal to let the government of Sharjah own more than a 50% stake in the bank. The government of Sharjah stepped in late last year to support the bank after it was hit by high levels of bad loans, partly due to its exposure to the troubled real estate and construction sectors. The shareholders also approved a proposal to allow the bank to merge with one or more than one bank without a vote. The shareholder meeting also approved an increase in share capital of the bank and a reorganization of the Board of Directors.
Source: Bloomberg, Emirates NBD Research
Dovish tone of the FOMC meeting minutes and ECB’s press releases kept the bid for safe haven government securities intact. Yields on 2yr, 5yr and 10yr USTs closed lower at 2.32% (-3bp), 2.27% (-4bps) and 2.46% (-4bps) respectively and those on 10yr Gilts and Bunds were down to 1.09% (-1bp) and -0.03% (-2bps) respectively. Surprisingly, credit spreads also declined with CDS levels on US IG and Euro Main each closing down by a bp to 60bps each respectively.
Regionally, GCC bonds were range-bound with yield on Barclays GCC bond index closing unchanged at 3.99% though credit spreads widened by 2bps to 161bps.
In the primary market, AAA rated, Islamic Development Bank is believed to have mandated banks for a dollar denominated benchmark 5yr sukuk.
The dollar is trading near its two-week lows following the release of March’s FOMC minutes which confirmed that policy makers are taking a more patient approach with the normalization of monetary policy. As we go to print, the Dollar Index (DXY) is trading at 96.950.
On the other side of the Atlantic, GBPUSD remains just below the 1.31 level after gaining on Wednesday following a decision by European leaders to extend the deadline for the UK to leave the EU, avoiding a no-deal Brexit for the time being.
Equity markets were largely positive overnight with the S&P rising 0.35% and the EuroStoxx index up 0.3% despite the risk of tariffs being imposed by the US and EU. Local equities were mixed: the Tadawul and DFM rose (up 0.3% and 0.2% respectively) while the Abu Dhabi exchange fell 0.35%.
Oil markets were bid higher again overnight with Brent adding 1.6% to close at USD 71.73/b while WTI was up just shy of 1% at USD 64.61/b. OPEC revised lower demand growth for 2019 in its latest monthly report in line with lower growth expectations. The report also highlighted a precipitous drop in Venezuela’s production (self-reported) for March of 472k b/d. Market chatter continues to fixate on whether OPEC+ will need to extend production cuts into the second half of the year given sanctions on two of its key members.
US crude stocks jumped by 7.2m bbl last week as production continues to expand and exports dipped back slightly. Despite draws across much of the rest of the barrel total petroleum inventories rose 7.2m bbl. US crude output rose to 12.2m b/d.
China GDP growth stabilizes
US and EU prepare retaliatory tariffs
IMF downgrades global growth forecast