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Edward Bell - Commodity Analyst
Published Date: 24 September 2019
PMI data from developed economies continued to show signs of weakness in the manufacturing sector although the US remains a notable outlier. The Eurozone’s composite PMI fell to 50.4 in September from 51.9 a month earlier with manufacturing slumping to just 45.6. In Germany in particular the flash estimate for manufacturing fell to just 41.4 far below market expectations. Services in the Eurozone remains in expansionary territory but with the PMI at 52 it did miss market expectations. Japan has also not been spared from the weakness in global manufacturing with the industry PMI there falling to 48.9 for September from 49.3 a month earlier. New orders declined for a ninth month in a row while there is a limited backlog of work, suggesting no quick turnaround is to be expected. Services held up better than anticipated at 52.8 for September but that too showed a slowdown from August. The US, however, actually showed signs of improvement in the flash estimate for September with both the manufacturing and services PMIs improving slightly. The manufacturing PMI rose to 51 (compared with 50.3) while services moved up to 50.9 from 50.7 a month earlier. However, in the services subcomponents employment moved below 50 for the first time since Q1 2010, taking the composite employment figure down to 49.4 from 50.4 a month earlier.
Data published in the UAE central bank’s quarterly report shows that private sector employment in the UAE rose 1.0% y/y in Q2 2019, up from just 0.1% y/y growth in Q1 2019. Employment in the real estate sector grew 5% y/y in Q2, while construction, services, manufacturing and transport, storage & communications sectors saw job losses. Most of the growth in jobs in Q2 2019 was in Dubai and the Northern Emirates, with private sector jobs in Abu Dhabi down q/q. Significantly, average wages across all categories of work have declined over the last year.
Moody’s investor service has downgraded its growth forecast for Saudi Arabia to 0.3% in 2019 from 1.5% previously, citing lower oil production in the context of the kingdom’s over-compliance with its OPEC target.
Source: EIKON, Emirates NBD Research
Treasuries traded flat as risk appetite faded following weak economic data. The curve remained largely unchanged with yields on the 2y UST, 5y UST and 10y UST closing flat at 1.68%, 1.60% and 1.72% respectively.
Regional bonds caught up with move in benchmark yields over the weekend and was also helped by lack of escalation in geopolitical tensions. The YTW on Bloomberg Barclays GCC Credit and High Yield index dropped 2 bps to 3.20% and credit spreads hovered around 152 bps.
The Emirate of Abu Dhabi raised USD 10bn in a 3-tranche bond issue of 5y, 10y and 30y. The issue was priced at T+65 bps for 5y (USD 3bn), T+85 bps for 10y (USD 3bn) and T+110 bps for 30y (USD 4bn) respectively.
The dollar firmed against the other major currencies yesterday, with the Dollar Index (DXY) rising to 98.24 over the course of the day. The major contributing factor to this gain, was euro softness, with EURUSD closing below the 1.10 level at 1.0990 following soft economic data out of Germany. The German Composite PMI reading for September came in at 49.1, down from 51.2 the previous month and was in contraction territory for the first time in over six years. This has renewed fears of a recession in the Eurozone's largest economy and as a result the euro may continue to find itself under pressure in the short term.
Developed market equities closed lower as weak economic data weighed on investor sentiment. The S&P 500 index closed flat and the Euro Stoxx 600 index dropped -0.8%.
Regional equities closed mixed with major moves in Egyptian and Kuwaiti stocks. The EGX 30 index (-1.5%) dropped for a second consecutive trading session. The KWSE PM index added +1.1% on the back of continued strength in banking sector stocks. In terms of stocks, Commercial Bank International and Talaat Moustafa dropped -1.5% and -7.6% respectively.
Oil prices oscillated between gains and losses as the market assessed how quickly Saudi Arabia would be able to restore production. Brent futures ended the day higher, up 0.76% at USD 64.77/b while WTI gained nearly 1% to close at USD 58.64/b. Press reports that repairs to the affected Aramco facilities could take months, rather than weeks, contested with commentary from Saudi Arabia that production would be back to pre-attack levels as early as next week.
Forward curves continued to price in more tightness even if production could be restored sooner than expected with the 1-2 month spread in Brent holding at a backwardation of greater than USD 1/b while longer dated spreads remain wide.