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Aditya Pugalia - Director, Financial Markets Research
Published Date: 05 December 2018
Financial markets reversed their recent gains in a sharp move as a combination of scepticism over the US-China trade talks and fears of an economic slowdown weighed on investor sentiment. The scepticism stemmed from some tweets of the US President Donald Trump on a ‘real deal’ with China and virtues of tariffs. However, early this morning, China’s Ministry of Commerce has said that talks were ‘very successful’ and that they are confident of implementing the results agreed upon. The fear of slowdown is fuelled by inversion of the front end of the US Treasury curve with 2s5s at -1 bps.
The Reserve Bank of India (RBI) is scheduled to meet later today. The central bank is widely expected to keep rates on hold in light of softening economic growth, reduced pressure on inflation from oil and food prices and signs from the Federal Reserve that it is closer to the neutral rate in its tightening cycle. The focus instead will on the steps the RBI takes to ease liquidity in the system, changes it makes to its inflation forecast and whether it indicates a shift in stance following recent macro developments. Since the central bank’s last meeting, the INR has changed course and gained +3.8% 1m and 10y bond yields have dropped 25 bps 1m.
Brexit inches closer to its end-game. Ahead of the scheduled vote on 11th December 2018 over the agreed deal with the EU, the UK government was found in contempt of Parliament over its refusal to share the full legal advice underpinning the government’s Brexit deal. Also, a separate measure was passed to give Parliament more power over the Brexit process including formulating a Plan B. In an interesting aside, in a non-binding advisory, EU’s advocate general Manuel Campos Sanchez-Bordona said that the UK can unilaterally revoke Article 50.
Source: Bloomberg, Emirates NBD Research
Treasuries closed higher amid a sell-off in risk assets as the focus shifted to the inversion of the curve at the front-end. It is also worth noting that 2s10s (12 bps) is at its lowest level since 2007. Yields on the 2y UST, 5y UST and 10y UST closed at 2.79% (-3 bps), 2.78% (-3 bps) and 2.91% (-5 bps) respectively.
Regional bonds continued to gain from the drop in benchmark yields. The YTW on the Bloomberg Barclays GCC Credit and High Yield index dropped -3 bps to 4.64%. However, credit spreads widened for the first time in four days to 185 bps.
GEMS Education has completed repayment of USD 200mn sukuk.
Despite climbing as high as 1.2840 on Tuesday, GBPUSD pared these gains later in the day in day and finished almost unchanged at 1.2719. Initially rallying on after reports that Legal Opinion stated that the UK could revoke article 50, pressure on the pound quickly resurfaced after Parliament ruled the government in contempt over Brexit legal advice, causing the pound to fall to new 2018 lows of 1.2659, before recovering. As we go to print GBPUSD is trading 0.11% lower at 1.2705 and is on target to fall for a fifth day.
This morning’s underperformer is the AUD which has softened against the other major currencies after weaker than expected economic data. A report from the Australian Bureau of Statistics showed that GDP in Q3 2018 missed on expectations for 0.6% q/q growth and slowed significantly to 0.3% q/q compared with 0.9% q/q the previous quarter. Currently AUDUSD is trading 0.57% at 0.72956. Should there be a break of the 23.6% one-year Fibonacci retracement (0.7284), further declines towards the 100-day moving average of 0.7240 may be seen. It is noteworthy though that daily uptrend that has been in effect since November 1st 2018 remains intact and will remain so while the daily close stays above 0.7254.
Developed market equities sold off aggressively amid growing concerns over the slowdown in global economy and scepticism over the US-China trade negotiations. The S&P 500 index and the Euro Stoxx 600 index dropped -3.2% and -0.8% respectively.
Regional equities were largely positive. The ADX index and the Qatar Exchange added +2.7% and +1.5% respectively. Egyptian equities, however, continued to remain under pressure with EGX 30 index losing -2.4% to take its year-to date losses to 16.0%. Banking sector stocks in Abu Dhabi led the broader index higher with FAB and ADCB gaining +3.7% and +3.8% respectively.
Oil futures managed modest gains overnight despite having been nearly up nearly more than 3% in mid-day trading. Brent futures closed up 0.63% at USD 62.08b while WTI added 0.57% to close at USD 53.25/b. The catalyst for price action remains whether OPEC can agree on a production cut at its meeting at the end of the week and if they can convince Russia to participate in cuts. So far there remains resistance to cutting output from Russian oil companies as they are operating comfortably with prices around current levels. Achieving a consensus decision at this week’s OPEC meeting will be complicated by Qatar’s announcement that it will withdraw from the producers’ bloc with effect from next year, even if its overall impact on oil market balances is relatively small.
Adding to the softer tone toward the end of the day the API reported an increase in US crude stocks of 5.4m bbl, running contrary to market expectations. EIA data will be delayed by one day this week.
Market structures remain solidly in contango for both Brent and WTI with both contracts earning negative roll yields.
Economic Calendar for the week
US CPI flat in January
UK GDP growth slows further in Q4 2018
Dollar benefits from recent events