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Edward Bell - Commodity Analyst
Published Date: 16 July 2019
Trade talks between the US and China are set to resume this week with both the Treasury Secretary, Steven Mnuchin, and Trade Representative, Robert Lighthizer, engaging with their Chinese counterparts. Financial markets have been supported since the G20 meeting in June partly by hopes that the “trade truce” between both countries would endure and lead to a more comprehensive agreement. However, US President Donald Trump again took to Twitter to pressure China, citing US tariffs as a contributing factor to China reporting annual GDP growth of 6.2% in Q2. The US is expecting China to increase purchases of agricultural products in particular as part of any deal but given a serious swine flu outbreak in the country there will be limits on demand for animal feed.
Ursula von der Leyen, a candidate for the next European Commission president, said that she would support giving the UK more time to negotiate its exit from the EU, offering a possible extension beyond the current deadline of October 31st. While both the UK and EU are currently mired in changes of leadership the chances of renegotiating the UK’s withdrawal terms appears slim. The EU parliament votes today on whether to support von der Leyen to replace Jean-Claude Juncker as head of the EU’s executive body.
Turkey’s new central bank governor, Murat Uysal, said the CBRT had “room for manoeuvre” on monetary policy, suggesting a rate cut is imminent. The next policy meeting takes place on July 25th where a cut from current policy rates of 24% is expected. The Turkish lira has oscillated following the change in leadership at the central bank but has managed to hold at around at USDTRY 5.7 handle in the last fortnight.
India is the latest economy to report softening trade figures with imports declining by 9% y/y in USD terms in June. Oil imports, helped by lower prices during June, were down 13.3% although there has been an undercurrent of soft fuel consumption in India in recent months. Exports fell for the first time in nine months, declining by 9.7% y/y. India has been an indirect casualty of the US-China trade war but is also now on the direct receiving end of US tariffs. The relative softness creeping into the external sector may prompt more dovish action from the RBI even as inflation has ticked higher in recent reports.
Source: Bloomberg, Emirates NBD Research
Treasuries started the week on a positive note. However, trading was dominated by light volumes. The curve flattened slightly with yields on the 2y UST, 5y UST and 10y UST closing at 1.82% (-2 bps), 1.84% (-3 bps) and 2.08% (-4 bps) respectively.
Regional bonds continue to benefit from moves in benchmark yields. The YTW on Bloomberg Barclays GCC Credit and High Yield index dropped -3 bps to 3.49% and credit spreads tightened 1 bp to 153 bps.
Moody’s assigned a provisional Baa3 senior unsecured rating to the proposed USD 1bn debt program to be set up by Emirates Strategic Investments Co.
The dollar remained fairly flat at its close yesterday, up 0.1% at 96.933 and largely unchanged against the major currencies. It remains below its 50- and 100-day moving average and has been testing the 200-day average in intraday trading in recent days as markets look ahead to a likely Fed rate cut later this month.
Developed market equities closed marginally higher as earnings continued to remain steady. However, investor’s continue to remain cautious at the start of the week which is expected to be dominated by various Fed speakers. The S&P 500 index and the Euro Stoxx 600 index added +0.1% and +0.2% respectively.
Regional equities closed mixed. The DFM index and the Tadawul were notable exceptions with gains of +0.4% and +0.3% respectively. Gains from market heavyweights helped the DFM index with Emaar Properties adding +1.7% and Arabtec Holdings jumping +3.0%.
As the impact of Hurricane Barry wanes and US oil production is set to resume, oil prices started the week on a softer footing. WTI slipped by 1% while Brent futures fell by 0.4% and both contracts are edging lower this morning. Time spreads strengthened in Brent to a backwardation of USD 0.56/b in 1-2 month spreads (compared with less than USD 0.4/b at the end of last week) while the contango in WTI deepened as production shutdowns in the Gulf of Mexico have been short-lived.
The EIA expects shale production in the US to rise by almost 50k b/d m/m in August to hit a new record of 8.55m b/d. Production growth in the Permian shale basin, the largest source of supply from shale basins, is set to slow to 34k b/d m/m.
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