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Timothy Fox - Head of Research & Chief Economist
Published Date: 14 January 2020
Further signs that the U.S. and China are moving towards signing a phase one trade deal tomorrow came yesterday with the news that the White House will lift the ‘currency manipulator’ designation from China. China was formally branded a currency manipulator in August last year, which was the catalyst for the CNY moving over the 7.0 level against the USD. The Trump administration yesterday said that China had made ‘enforceable commitments’ not to devalue the CNY and has agreed to publish exchange rate information. The Treasury’s semi-annual foreign exchange report released yesterday urged China to increase public understanding of its exchange rate operations, but said that the PBOC has largely refrained from intervention in 2019. The news sent the CNY to a 6-month high yesterday and today it is trading below 6.90 level against the USD as markets sense a trade deal is on its way.
The news cam as China’s exports to the U.S. were reported as having expanded 5% y/y in 2019, while imports from the U.S. rose 1.6%, widening the trade surplus with the U.S. by 25.4% to CNY2.92 trillion for the year.
The UK economy contracted by 0.3% m/m in November, down from 0.1% growth the previous month and worse than the market expected. While this decline can partly be attributed to activity being brought forward before the October 31st Brexit deadline, the number sill means that the economy probably contracted in the final quarter of 2019. To add to this industrial production also declined 1.2% m/m in November while manufacturing production fell by 1.7% m/m, as geopolitics and trade concerns continue to pressure the sector. Such data would seem to support further easing of monetary policy by the Bank of England which has recently adopted a more dovish tone, with Governor Carney hinting at a rate move last week, and MPC member Gertjan Vieghe saying he would support a rate cut this month if there is no signs of economic improvement since the general election. As things stand the market pricing in a 51% chance of a cut at this month’s MPC meeting.
Source: Emirates NBD Research, Bloomberg
Treasuries closed lower following a revival in risk sentiment. The losses in the German curve following pricing of EUR 3bn EFSF bond offering also weighed on investors. Yields on the 2y UST and 10y UST closed at 1.58% (+1bp) and 1.84% (+2 bps) respectively.
Regional bonds continued to trade flat. The YTW on Bloomberg Barclays GCC Credit and High Yield index closed at 3.18% even as credit spreads continued to tighten to 142 bps (-2 bps).
USDCNY is trading below 6.90 this morning, a 6-month low, while the JPY weakened past 110 per USD for the first time in eight months as confidence about the US and Chaina signing a trade deal tomorrow is gaining ground. This follows the news that the U.S. has dropped the FX manipulator label from China yesterday, after having designated China as one in August last year. GBP lost ground yesterday, hurt by a combination of weak economic data and recent comments from BOE offcials hinting at another pivot to lower interest rates. Meanwhile there were also comments from a variety of UK and EU officials that Brexit arrangements between the EU and the UK will take more than a year to put in place.
Developed market equities closed mixed. US equities rallied as investors saw some tangible signs of trade peace between the US and China following the decision of the US Treasury department to remove the tag of currency manipulator from China. The S&P 500 index added +0.7% while the Euro Stoxx 600 index dropped -0.2%.
Regional equities rallied sharply with all major indices closing in the green. The DFM index and the Tadawul added +0.8% each. Gains were led my market heavyweights with Emaar Properties and Dubai Islamic Bank adding +0.7% and +1.1% respectively. The Tadawul was led higher by banking sector stocks with Al Rajhi Bank and Samba gaining +0.3% and +0.6% respectively.
Oil prices started the week downbeat, failing to take any cheer from the pending signing of a phase one trade agreement between China and the US. Brent futures closed down more than 1% at USD 64.20/b while WTI was off by 1.6% to settle at USD 58.08/b.
Forward curves nudged lower with WTI spreads at the front of the curve closing at flat. In early trading today, they have pushed into a very modest contango for the first time since November. While negligible, the shift in the shape of the curve will send a worrying signal over the potential strength of markets going forward.
Saudi Arabia’s energy minister, Prince Abdulaziz bin Salman, told an energy event the Kingdom would ensure oil markets were stable in 2020 but also wanted to see sustainable growth in oil consumption this year. Any decision on OPEC+ production levels would only be taken at the group’s next meeting in March. However, CNPC, China’s largest oil company, cast some doubt about the overall level of demand growth this year, warning in its annual outlook that consumption may only grow by 2.4% compared with more than 5% estimated in 2019.
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