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Timothy Fox - Head of Research & Chief Economist
Published Date: 12 December 2018
The Brexit saga continues with UK Prime Minister Theresa May touring European capitals to seek concessions over her exit deal, while back in London rumours swirl of an imminent vote of no confidence in her leadership by her Conservative party colleagues. So far it seems that meetings in Berlin, Brussels and Amsterdam have not yielded any progress and patience with her approach in the UK is wearing very thin. GBP continues to wallow at 20-month lows with the prospect of extended uncertainty over the holidays adding to the pressure. An EU Council meeting takes place on Thursday but even this may be too late to save May’s leadership.
UK labour market data yesterday showed employment rise by 79k in the three months to October, with this strength helping to feed higher wages, with the headline (three-month average of the annual) average earnings rising to 3.3% y/y up from 3.1%. The rise in wages confirms recent PMI survey data showing the impact of a tight labour market on pay demands. The jobless rate remained unchanged at 4.1%. Meanwhile in Germany ZEW investor expectations unexpectedly improved to -17.5 in December from -24.1 in November. Expectations had been for a further deterioration in the headline rate in view of ongoing volatility on markets and Brexit risks, but in the event the survey suggests investors are more sanguine about the outlook than in the previous month. US producer prices rose just 0.1% m/m in November, largely due to a decline in gasoline prices, with core prices rising by 0.3%.
The latest tourism data for Dubai show total visitor numbers unchanged in the year to September compared with the same period in 2017, at 11.6mn people. Visitor numbers from the top 3 source markets (India, Saudi Arabia and the UK) were down y/y as were visitors from Oman, Kuwait and Pakistan. However, this was offset by a 60% rise in the number of tourists from Russia as well as more visitors from Germany (15% y/y), China (12% y/y) and the US (4% y/y). The latest Dubai Economy Tracker survey highlights the margin pressures for firms in the travel & tourism sector, as increased supply coupled with a lack of growth in demand this year have weighed on pricing in the sector. Supply in the hotel sector is expected to continue rising in 2019, as new capacity comes online ahead of Expo 2020.
Source: Emirates NBD Research, Bloomberg
Treasuries traded lower but pared some of those losses as Donald Trump threatened to shut down the government if his demands for border wall is not met. Yields on the 2y UST, 5y UST and 10y UST closed at 2.76% (+4 bps), 2.74% (+3 bps), 2.87% (+2 bps) respectively.
Regional bonds continued to trade in a tight range. The YTW on the Bloomberg Barclays GCC Credit and High Yield index rose +1 bp to 4.63% and credit spreads tightened 2 bps to 188 bps.
Saudi Arabia raised SAR 2bn after completing a tap offering of 2018 issuance. The money was raised in three tranches of 2023, 2025 and 2028.
GBPUSD fell an additional 0.59% on Tuesday to close at 1.2487, having hit yet another new 20-month low of 1.2480. This retest and break of the 1.25 level was in line with our expectations and should the price continue to close the day below the two-year 23.6% Fibonacci retracement (1.2550), we expect a more significant decline can be expected.
Wednesday morning begins with AUD as the strongest performer, gaining on risk appetite as equities rise during the Asia session. As we go to print, AUDUSD is trading 0.22% higher at 0.7222. We expect support to be found at the 50-day moving average (0.7187) and resistance at the 100-day moving average (0.7230), with both levels having provided support and resistance towards the latter half of last week, and thus far this week.
On the other end of the spectrum, JPY is the worst performing G-10 currency, as risk appetite has triggered yen weakness. USDJPY currently trades at 113.46.
Developed markets closed mixed amid some development on the US-China trade talks. The S&P index gave up intraday gains to close flat while the Euro Stoxx 600 index added +1.5%.
There was a rebound in regional equities. The DFM index added +1.4% while the Tadawul gained +0.3%. Emaar Properties and Dubai Investments led the rally on the DFM with gains of +2.8% and +11.1%.
Oil gained overnight with WTI seeing gains of nearly 1.3% and Brent up around 0.4% as market anxiety over the impact of a trade dispute between China and the US eased (industrial metals followed suit). Both contracts are up nearly 1% in early morning trading. The EIA released its latest short term projections for the oil market and expects oil supply from the US to grow by 1.18m b/d next year, slightly higher than previously although the upgrade is thanks to a marginal downgrade for this year’s forecast. At the end of 2019 the EIA expects the US to supply around 12.29m b/d. The agency has also been lowering its forecast for the amount of crude needed from OPEC for the last three reports.
Markets digest EU election results
UK Prime Minister May to resign
Fed maintains neutral stance
China GDP growth stabilizes