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Edward Bell - Commodity Analyst
Published Date: 16 July 2018
Trans-Atlantic relations were again the major macro theme of the weekend as US president Donald Trump attended the NATO summit and visited the UK. President Trump initially appeared to criticize the UK government’s newly launched Brexit plans, saying that trade deal with the US would not be possible if UK prime minister Theresa May carried out the plans as announced. However, Trump walked back from that position saying in a press briefing with May that “whatever you do is ok with us”, referring to the UK’s exit strategy. The president further distanced himself from traditional NATO allies by appearing to take credit for several nations planning to increase defence spending. Creating tension with NATO partners comes at a sensitive time for the security bloc as the president is also going to be carrying out a bilateral meeting with Vladimir Putin, his Russian counterpart, early this week.
The British government published its plan for Brexit at the end of last week, setting out how relations between the UK and EU would develop after the UK’s departure in March from the economic zone. Among the most consequential parts of the new plan was that UK would abandon ‘passporting’ of financial services exports and would instead try to move toward regulatory equivalence. The UK would also seek to keep free trade open for physical goods and agriculture products and maintain membership in regulatory bodies governing airlines, chemicals and medicine. The government is trying to adopt a compromised Brexit which could threaten May’s position if more MPs revolt against her and vote against a customs bill that is due for debate this week.
US core inflation ticked up to 2.3% in June from 2.2% a month earlier thanks to higher vehicle and medical car prices. There has yet to be an impact on US CPI from new tariffs that have been introduced but the effects may start to filter in over the rest of the year once trade patterns have time to shift. Fed chair Jerome Powell will appear before Congress this week and will reiterate the strong performance of the US economy, allowing it to keep raising rates gradually.
China’s economy slowed in the second quarter to growth of 6.7% year on year compared with 6.8% in the first three months of the year. However, on a quarterly basis growth accelerated to 1.8%, better than expected.
Source: EIKON, Emirates NBD Research.
Treasuries closed lower as the risk-on mode returned. The recent trend of short-end of the curve underperforming the long end of the curve continued. Yields on the 2y UST, 5y UST and 10y UST closed at 2.57% (+4 bps w-o-w), 2.72% (+1 bps w-o-w) and 2.82% (flat w-o-w) respectively.
Regional bonds closed higher for a third consecutive week helped by easing of concern on Bahrain. The YTW on the Bloomberg Barclays GCC Credit and High Yield index dropped -5 bps w-o-w to 4.44% and credit spreads tightened 7 bps to 176 bps. The 5y Bahrain CDS spread dropped -16 bps w-o-w to 385 bps.
Moody’s raised Qatar’s credit outlook to stable from negative and affirmed the rating at Aa3. The rating agency said that the country can withstand the current embargo for an extended period without a deterioration of its credit profile.
The Dollar Index rose 0.78% last week to close at 94.699. It is noteworthy that over the course of the week, the Index found support at the 50 day moving average (94.068) and closed above this level for the remainder of the week. This leads us to believe that this level should continue to act as a short term-support. In addition, despite a test of the 76.4% one year Fibonacci retracement (93.813), further declines were halted. While the price remains above these key levels, a retest of the 200 week moving average (95.195) remains the path of least resistance. This key resistance level has capped gains over the last five weeks and a break of this level is likely to initially result in further gains towards the 2018 high of 95.535 followed by advances towards the 50% five year Fibonacci retracement (96.036).
Regional equities started the week on a positive note with the DFM index and the Tadawul adding +0.6% and +0.5% respectively. DXB Entertainments gained +1.7% after the company reported a 46% increase in visitor for H1 2018. Zain Saudi lost -0.3% after the company reported Q2 2018 loss of SAR 38mn compared to a profit of SAR 8mn a year ago.
Oil declined over the course of the week, largely as a result of the sharp decline on Wednesday. Brent futures settled at USD 75.33/b, down 2.3% while WTI lost 3.8% to close just above USD 71/b. Chinese crude imports fell in June to 8.36m b/d, their lowest level since December. Regional refining margins have been suffering in recent months as inventories, particularly of gasoline, have been elevated in Asia.
The Brent forward curve flattened considerably over the week and dipped into contango briefly at the end of last week as supply concerns eased. The imminent restart of Libyan production will weigh on Atlantic balances. Backwardation at the front of the WTI curve compressed with the 1-2 month spread now holding at around USD 1/b.
Investor positioning in oil futures and options was split. Investors added some new long positions in WTI but overall the increase was limited. In Brent, however, investors closed out around 11k contracts, bringing net length down by 9.6k lots.
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