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Timothy Fox - Head of Research & Chief Economist
Published Date: 06 May 2019
Trade talks are back in the spotlight this morning after Donald Trump upped the ante by threatening China with steeper tariffs ahead of the resumption of trade negotiations this week, causing China to threaten to pull out of the talks in response. Trump said on Sunday that he would increase tariffs on USD200bn of Chinese imports to 25% from 10% on Friday this week and he also raised the possibility of putting a 25% duty on another USD325bn of imports. The latest round of brinkmanship comes after markets had more or less assumed that a trade deal was a done deal, causing the recent positive risk mood to evaporate and risk aversion take over in Asia. China’s Vice PM Liu He was due to arrive in Washington on Wednesday for what was assumed to be the final round of talks, but with these now in doubt the markets have to come to terms with the possibility that a deal may not happen after all.
April’s non-farm payroll report showed the U.S. unemployment rate dropping to a forty-nine year low of 3.6%. Although 263,000 new jobs were created in April, accompanied with an upwards revision of 16,000 to March’s print, the report is not as positive as the headlines suggest. A large part of the decline in the unemployment rate may be attributed to a 490,000 reduction in the labour force while the average work week declined and average hourly earnings growth remained at 3.2% y/y, giving the report a more goldilocks tone.
The Bank of England voted unanimously to leave interest rates unchanged at 0.75% last week. However, they raised their growth forecasts slightly, highlighting an improvement in the global economy. In a slight change of stance, Governor Mark Carney warned the markets that should growth match the BOE’s forecasts, “more, and more frequent interest-rate increases than the market expects”, would occur. UK growth for Q1 is due out at the end of the week and is expected to rise by 0.5% q/q.
Source: Bloomberg,Emirates NBD Research
Government bonds traded in a narrow range albeit with slight hawkish bias on the back of stronger than expected jobs data in the US and the Fed Chairman Powell’s comment that the muted inflation was due to transitory factors. Yields on 2yr, 5yr, 10yr and 30yrs USTs closed the week up at 2.33% (+4bpsp, w/w), 2.32% (+1bp), 2.53% (unchanged) and 2.92% (-3bps, w/w) respectively. Across the Atlantic, sovereign bonds were mixed with 10yr Gilts adding to their previous losses as yield rose 6bps to 1.22% while 10yr Bund yield was slightly lower at 0.023%. Credit spreads inched a bp or two down on US IG as well as on the Euro Mian to 58bps each respectively.
Regionally, yield on Barclays GCC bond index dropped 3bps to 3.96%, directly in sync with the 4bps drop in credit spreads to 153bps on the back of high oil prices. While investors are unsure about how OPEC and its allies will respond on production volumes as U.S. waivers that allowed buyers to continue importing Iranian oil expired on May 2, the removal of Iran oil from the market boosted the case for higher oil prices which in turn boosted the sentiment on GCC bonds.
Moody’s affirmed Kuwait’s rating at Aa2/stable citing very strong government balance sheet.
Last week the dollar softened against a basket of the other major currencies, the Dollar Index falling 0.56% to close at 97.458, cancelling most of the gains of the previous week. Of significance is that the EURUSD cross has now closed for 8 weeks below the 200-week moving average (1.1341) and at its current level of 1.1198, the price remains vulnerable to further declines towards 1.10.
GBPUSD posted a 2.01% gain to close at 1.3173 and break above the 50-week moving average (1.3013) for the first time in 3 weeks. This level had previously capped gains during the last week of April and the break is technically significant. Reinforcing this, last week’s movements saw a break above the 200 (1.2959), 100 (1.2987) and 50-day (1.3109) moving averages and the close is above the one-year 61.8% Fibonacci retracement (1.3168). In the week ahead, technical indicators point to a short-term test of the 100-week moving average (1.3227).
DM equities closed higher on Friday with the S&P 500 index and the Euro Stoxx adding 0.96% and 0.39% respectively, however, futures market reflect sentiment weakening over the weekend due to negative headlines relating to the US-China trade talks. Asia has opened deeply in the red with Nikei and Hang Seng down by 0.22% and 3.31% respectively in early morning trades today.
Regional markets were also down yesterday. Tadawul fell nearly 1.7% on the back of profit taking, particularly in banking shares. Similarly Abu Dhabi index was also down by more than 0.4% and
Dubai bourse closed down by 0.2%
Both benchmarks closed down on the week last week, with Brent futures falling 1.8% to USD 70.9/b and WTI by 2.1% to USD 61.9/b. Prices are under further pressure as the new week begins, with Brent trading down at USD 69.3/b at the time of writing, down 2.2%. This marks the lowest levels seen in a month, as fears over trade concerns and related demand for oil resumed on the back of a tweet by President Donald Trump which cast doubt over trade talks between the US and China.
It has also emerged that Saudi Aramco cut June pricing for crude to the US, while raising pricing to other regions. This move is seemingly aimed at placating the US and Donald Trump given his opposition to high oil prices, while still benefitting from the higher prices its production curbs have helped generate elsewhere.
Interest rates to remain in the spotlight
Slowdown showing up in Indian trade
Weakening global PMIs
Relative value in global sukuk
Synchronised central bank rate cuts