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Timothy Fox - Head of Research & Chief Economist
Edward Bell - Commodity Analyst
Aditya Pugalia - Director, Financial Markets Research
Daniel Marc Richards - MENA Economist
Published Date: 11 March 2020
Markets will be watching governments closely today to see what steps are to be taken to help offset the economic impact of the coronavirus outbreak. US President Donald Trump didn’t attend a briefing yesterday where he was expected to outline plans for a fiscal response—prompting US equity futures to sell off. So far a payroll tax cut has been mooted for the US but improvements to consumers’ pockets may not count for much if they are quarantined or shops are shuttered because of the virus. In the UK, the government will release its first budget since the December general elections with expectations that there will be considerable spending on healthcare. The budget had already been expected to support growth through wider infrastructure investment and skills spending and will now be topped up by more direct coronavirus-related spending. However, ensuring that new spending on healthcare is productive and the economy is not left with a surfeit of hospitals once the coronavirus outbreak subsides will be a challenge. Germany too has been slow to outline any major stimulus measures, seemingly preferring to see how bad the damage gets before responding rather than pro-actively trying to defend the economy.
Egypt’s headline CPI inflation slowed to 5.3% in February, from the 7.2% recorded the previous month. Lower vegetable prices were reportedly below the dip in price growth, which potentially gives the CBE room to cut rates at its April 2 MPC meeting, given that real rates have risen to 7.0%. However, the uncertainty owing to the coronavirus outbreak, which has now reached Egypt, will likely prompt the bank to keep rates on hold while they look for greater certainty. While central banks around the world have been cutting rates, ostensibly giving the CBE greater room to ease, Egypt will be more eager than ever to maintain its attractiveness to international portfolio investors in a period of risk-off sentiment, which has already been reflected in a depreciation in the pound in recent weeks.
Bloomberg reports that Oman is in talks to raise more than USD 1bn in loans in H1 2020 to partially finance its budget deficit. We estimate that Oman’s budget deficit will widen to over OMR 4bn (USD 10.4bn) this year based on an average oil price of USD 45/b and some increase in oil production in line with other GCC oil exporters, if the government takes no steps to curb spending. The 2020 budget had made provision for a deficit of OMR 2.5bn (around USD 6.5bn), assuming an oil price of closer to USD 60/b for 2020. Oman also has USD 1bn of government debt maturing this year, according to Bloomberg data.
Treasuries closed lower as investors turned their focus to reports of a broad stimulus package from the US government. However, the moves also needs to be seen in perspective of sharp rallied over the last 10 days. Overall, yields on the 2y UST and 10y UST closed at 0.53% (+15 bps) and 0.80% (+26 bps). It is important to note here that USTs have seen double digit percentage moves for all but 2 trading sessions since the start of last week.
Regional markets continue to see investors taking cash off the table. The YTW on Bloomberg Barclays GCC Credit and High Yield index rose +6 bps to 3.18% and credit spreads tightened 19 bps to 236 bps.
The USD appreciated quietly yesterday amidst an improvement in risk sentiment, reaching highs of 105.92 against the JPY. Japanese PM Shinzo Abe unveiled a second set of emergency virus steps in response to coronavirus, amounting to over 1.6trillion yen (USD 15bn) of spending measures in total, and now the markets are awaiting a US government stimulus program. Firming U.S. yields and stocks were to the USD’s advantage helping it improve across the board. EURUSD remained under the 1.1400 mark through the day, and well under the high of 1.1496 seen on Monday. GBP will be in focus today as the Johnson government announces its first budget which is also expected to contain stimulus measures.
It was a volatile day of trading for developed market equities as investors remained cautious about stimulus plans of governments. The S&P 500 index added +4.9% but the Euro Stoxx 600 index gave up intra-day gains to close -1.1%.
Regional markets saw investor interest return on the back of gain in oil prices and calmer global backdrop. The DFM index and the Tadawul added +7.3% and +7.1% respectively. The rally was broad based with most stocks seeing gains.
Oil prices managed to recover some ground yesterday with Brent futures rising more than 8% to close at USD 37.22/b and WTI up more than 10% at USD 34.36/b. Normally such gains would be eye-watering but in the context of Monday’s cataclysm they hardly raise an eyebrow. A recovery from the hysterical moves to start the week was likely and crude prices will now need to find a new trading range, bound on the top side by the spreading coronavirus outbreak and on the bottom by how much crude Saudi Arabia and Russia are prepared to unload onto markets in the coming months. Both contracts are higher this morning on hopes that governments globally will begin to unveil stimulus packages: so far, however, nothing that has been proposed looks particularly compelling from an oil demand perspective.
Saudi Aramco has said that it will supply 12.3m b/d of crude to markets in April, more than Saudi Arabia’s total capacity. The surge in production would represent an increase of around 2.6m b/d m/m from current levels close to 9.7m b/d. The production increase in the next broadside from Saudi Arabia after Aramco’s announcement to slash official pricing over the week. For their part, Russia’s energy minister said that oil prices will take “several months” to recover, implying the country is prepared to engage in a protracted price war this year. While an increase in oil production would help boost real GDP growth rates for Saudi Arabia the scale of increase is enormous and will weigh even more on prices, contributing to a substantial widening of Saudi Arabia’s fiscal position.
Markets shrug off US-China tensions for now
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Markets jump on hope of a vaccine