Edward Bell - Commodity Analyst
Athanasios Tsetsonis - Sector Economist
Aditya Pugalia - Analyst
Published Date: 07 November 2017
Jerome Powell, US president Trump’s nominee as next chair of the Federal Reserve, faces more challenge in building a consensus next year as the New York Fed has confirmed that its head, William Dudley will retire earlier than planned next year. The New York Fed president has a permanent voting position on the Fed board and Dudley had been a dovish supporter of monetary stimulus. The Fed goes into 2018 with several vacancies on its board, however, the market still largely expects Powell to carry on with a process of withdrawing monetary stimulus and hikes.
Germany manufacturers got a boost in September with industrial orders gaining 1% compared with market expectations for a decline of 1.5%. Orders were higher on the back of increased export orders (up 1.7%) while domestic demand was less robust. A relatively weaker euro during September likely helped to make German goods more attractive on international markets and will help to provide some tailwinds for the German economy as it moves into the final months of the year.
The Eurozone economy slowed in October according to the latest data from IHS Markit. The composite PMI for October fell to 56 from 56.7 a month earlier, still healthily in expansionary territory, however. Eurozone firms have been able to pass on higher input costs but healthy demand conditions are allowing price gains to be more sustainable. The employment component improves month/month, suggesting firms are quite sanguine about the near term outlook for growth as the ECB prepares to taper its level of monetary stimulus.
Retail sales in the UK fell in October, declining by 1% y/y as above target inflation bites into consumer spending. Data from the British Retail Consortium showed spending slowed from growth of 1.9% in September and warned that it sends a nervous message ahead of the upcoming holiday season. Food purchases increased but largely down to the impact of high inflation. After the Bank of England raised interest rates last week in an attempt to get control of elevated inflation there is a risk that retail spending and consumption generally will dip as purchases, particularly large ones, become relatively more expensive.
Source: EIKON, Emirates NBD Research
US Treasuries started the week on a positive note amid sharp gains in European government bonds. Yields on the long end of the curve dropped with 5y USTs yielding 1.98% (-1 bps) and 10y USTs 2.31% (-2 bps). Yields on the 10y Bunds dropped 3 bps to 0.33%.
Regional bond markets felt some repercussions from the crackdown on corruption in Saudi Arabia. The yield on the Bloomberg Barclays GCC Credit and High Yield index rose 4 bps to 3.62% and credit spreads widened by 5 bps to 159 bps.
The CDS rose across the region with 5y Saudi Arabia CDS rising 7 bps to 90 bps and Bahrain 5y CDS increasing 4 bps to 269 bps. The impact was muted on bonds with KSA 28s closing less than half a point lower at 99.27.
The greenback started the week on a softer footing, falling against most of its major peers. Uncertainty over whether the US Congress will indeed be successful in passing a new tax plan. Sterling was a major gainer on the day, up 0.7%, despite a concern over the lack of progress in Brexit negotiations. The Euro was broadly stable as data affirmed the ECB’s pace of easing monetary stimulus.
Developed market equities closed higher commodity prices continued their positive run. The S&P 500 index and the Euro Stoxx 600 index added +0.1% each.
Regional markets traded lower with the exception of the Tadawul (+0.1%) where the index pared early session losses for a second consecutive trading session. The DFM index and the Qatar Exchange lost -1.2% and -1.4%.
Banking sector stocks led the rebound on the Tadawul for a second consecutive session with the Tadawul Banking index adding +0.6%. Elsewhere, it appeared a case of investors selling to hedge against heightened uncertainty. Emaar Properties dropped -1.8% and Qatar National Bank lost -0.8%.
Oil futures jumped higher to begin the week on elevated geopolitical risks in the Middle East. Brent futures closed more than 3.5% higher at USD 64.27/b and WTI gained 3.1% to close above USD 57/b. While there is likely to be no direct impact on oil policy from the corruption purges in Saudi Arabia, any political risk in a major producer will add upside to oil prices. The momentum of the market is taking prices to their highest levels in more than two years and persistent fear of political risk will likely keep a risk premium in prices for the near term.
Market expect 25bps Fed hike in week ahead