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Edward Bell - Commodity Analyst
Published Date: 29 January 2019
Markets will be preparing today for more votes in the UK parliament on amendments to the government’s Brexit bill. The votes won’t be binding on the government if they pass but could set the trajectory for further negotiations between the UK and EU on the terms of Brexit. One amendment put forward by Labour party members proposes that parliament takes control of Brexit away from the government and postpone the exit date to the end of the year if the government cannot get a deal approved by the end of February. Sterling has rallied since the start of the year on the market’s assumption that a softer Brexit may be the most likely outcome. However, a delay of Brexit doesn’t rule out a no-deal Brexit as opposition from in the Conservative party around the contentious parts of PM Theresa May’s plan, such as the Irish backstop, still need to be overcome.
The unemployment rate for Saudi nationals declined marginally in Q3 2018 to 12.8% from 12.9% in Q2. However, this appears to reflect a decline in the number of job seekers rather than an increase in employment, with the number of Saudi job seekers falling -17.5% q/q (-25% y/y) in Q3 2018. Job creation for nationals is an important pillar of the Kingdom’s Vision 2030 plan. Increased fees on expatriate workers and firms hiring expatriates has seen the number of foreigners employed in the Kingdom decline -10.4% y/y in Q3 2018. The National Industrial Development and Logistics Programme, launched yesterday, is the latest initiative to boost investment and create jobs in the non-oil sectors of the economy. The Kingdom has reportedly signed USD 54bn of deals covering the defence, chemical and manufacturing industries as part of the plan.
US-China trade talks will resume later this week in a hostile environment after the US government charged Huawei, a Chinese telecoms company, with fraud. Liu He, the vice premier of China, will be in the US to carry on trade negotiations to avoid the trade war ceasefire ending without a deal and seeing tariffs imposed in early March. The trade negotiations this week are likely to focus on implementation and supervision mechanisms on reform of China’s trade policies and support for government-linked companies.
Source: Haver, Emirates NBD Research
Treasuries closed higher led by the front and belly of the curve. Yields on the 2y UST, 5y UST and 10y UST closed at 2.59% (-1 bps), 2.58% (-2 bps) and 2.74% (-2 bps) respectively.
Regional bonds closed marginally lower as oil prices dropped sharply. The YTW on the Bloomberg Barclays GCC Credit and High Yield index rose 3 bps to to 4.49% and credit spreads widened 4 bps to 187 bps.
FX markets generally moved to risk off positioning to start the week. Sterling slipped 0.3% back below the 1.32 handle while JPY appreciated marginally. The Fed begins its first FOMC meeting of the year today so markets may be tentative until a clearer trajectory for rates, and the economy, comes out of the meeting tomorrow.
Developed market equities closed lower on the back of weaker corporate earnings. The S&P 500 index and the Euro Stoxx 600 index dropped -0.8% and -1.0% respectively.
Regional equity markets trade sharply higher. The DFM index and the Tadawul rallied +1.2% and +1.4% respectively. Real estate sector stocks rebounded with Emaar Properties and Damac adding +1.7% and +5.8% respectively. It appears to be a case of investors’ bottom fishing. Elsewhere, Doha Bank dropped -6.0% after the bank announced lower than expected dividend payout.
Oil prices fell sharply to begin the week as trade optimism soured and markets fixated on bearish factors, such as an increase in the US drilling rig count. Brent futures closed down 2.77%, back below USD 60/b while WTI fell more than 3% to close just under USD 52/b. The US government has imposed sanctions on PDVSA, Venezuela’s state oil company, in response to political crisis affecting the South American nation. American companies could still technically buy oil from Venezuela but funds will not be transferred back to PDVSA, making sales unlikely. The US imports around 500k b/d from Venezuela which will now be diverted to other markets.
Brent time spread tightened overnight while there was little reaction to the Venezuela’s news in the WTI forward curve. Spreads on 1-2 months in the Brent curve are holding above USD 0.1/b in backwardation while the contango in WTI is holding at around USD 0.3/b.
US CPI flat in January
Growth forecasts lowered
S&P downgrades Pakistan
Dollar benefits from recent events