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Daniel Marc Richards - MENA Economist
Published Date: 18 September 2019
Saudi Arabia’s energy minister allayed some fears regarding the potential length of the outages at the Kingdom’s oil facilities in a press conference last night. The newly appointed minister, Prince Abdulaziz bin Salman, said that the Abqaiq processing plant was already back up to 2mn b/d and would be back at capacity 4.9mn b/d by the end of the month. Further, he stated that Saudi Arabia would meet its crude export commitments through curbing domestic refining, and drawing upon its strategic reserve. Brent prices fell more than 6%, but remain 7% up on those seen prior to the attacks at the close of last week.
US industrial production expanded 0.6% m/m in August, compared to a (revised) -0.1% in July, and far exceeding expectations of 0.2%. This follows a raft of strong data points seen at the close of last week, but is unlikely to prevent a 25 bps rate cut at the Fed’s FOMC meeting later today. Chair Jerome Powell is expected to emphasise the weak outlook for investment, and the ongoing risks from global trade tensions. It does make the prospect of a larger 50bps cut even less likely however.
September’s ZEW survey results from Germany were mixed yesterday, with a substantial improvement in business optimism somewhat mitigating the poor reading on current conditions. The current situation survey weakened to -19.9, down from -13.5 in August, and missing expectations of -15.0. However, the index of expectations for the next six months came in at -22.5, from -44.1 last month and far stronger than consensus -38.0. Measures taken by the ECB last week – most notably, cutting the deposit rate, resuming QE and calling for greater fiscal action by Eurozone governments – alongside moderately easing trade war concerns lay behind the weaker pessimism.
Source: Bloomberg, Emirates NBD Research
Treasuries traded in a reasonably tight range ahead of the Federal Reserve decision later today. The lack of escalation in geopolitics also helped investor sentiment. Yields on the 2y UST, 5y UST and 10y UST closed at 1.72% (-3 bps), 1.65% (-4 bps) and 1.80% (-4 bps) respectively.
In a surprise development, overnight repo rates in the US jumped to as high as 10% at one time. This forced the Federal Reserve to intervene. Additionally, the Fed said that they will be offering another USD 75bn later today. The overnight repo rate was trading c.4% at the time of this writing.
Regional bonds closed largely unchanged. The YTW on Bloomberg Barclays GCC Credit and High Yield index was flat at 3.24% and credit spreads hovered around 146 bps.
The dollar is trading firmer against the other major currencies this morning, with the Dollar Index (DXY) 0.10% higher at 98.286. Technically, further gains are the path of least resistance while the index continues to close above the 50-day moving average (97.974), a level which provided support on September 13th.
This evening all eyes will be focused on the outcome of the FOMC meeting, where policy makers are expected to cut interest rates by 25bps. Should the central bank recommunicate the stance that this cut is part of a ‘mid-cycle adjustment’ to ensure continued expansion rather than the beginning of a protracted easing cycle, the dollar could rally further. The risk of this outcome will increase if it is reflected in the DOT plot and economic projections.
Developed market equities closed marginally higher as oil prices gave up some of its recent gains following assurances from the Saudi energy minister. The S&P 500 index added +0.3% while the Euro Stoxx 600 index added +0.1%.
Regional equities closed lower as investors continue to remain in wait and watch mode. The DFM index and the Tadawul lost -1.0% and -0.7% respectively.
Saudi Arabia’s energy minister tried to reassure markets overnight that production in the Kingdom was being restored rapidly as repair work was underway at the Abqaiq processing centre. According to a press conference last night, Prince Abdulaziz bin Salman, said that half of the affected production had been restored and that capacity would increase to 12m b/d by the end of November. Until then, importers of Saudi crude would continue to be supplied, including through inventory draw downs.
Markets took some relief on the news that damage to Aramco facilities had been contained and benchmark futures fell sharply. Brent futures lost almost 6.5% to close at USD 64.55/b while WTI ended the day at USD 59.34/b, down 5.66%. Forward curves also corrected lower with the 1-2 month spread in Brent closing below USD 1/b. Dubai time spreads, however, showed only minimal compression as the market continues to wait to assess any quality changes in Saudi exports over the coming months.
While the overall impact on volumes appears to be limited, or at least not expected to endure for a long period, oil markets will continue to monitor geopolitical risk closely and may be twitchy on relatively minor developments from the region.
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