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Timothy Fox - Head of Research & Chief Economist
Published Date: 23 July 2018
US President Donald Trump made a number of media pronouncements at the end of last week in which he recommitted to the tariffs his administration is imposing on various trading partners. He told CNBC that he was prepared to escalate the spat with China as it was ‘the right thing to do for our country’, while on the subject of the EU he complained that ‘they’re making money easy’ while the US was ‘losing’ USD 150bn. German Chancellor Angela Merkel responded to some of these issues during a press conference on Friday, in which she decried the US’ proposed autos tariffs as ‘a real threat to the prosperity of many in the world.’ Germany’s DIHK Chambers of Commerce has estimated that US autos tariffs could knock as much as USD 7bn off German economic output. US consumers will also be hit, with estimates put forward that the cost of a car could rise as much as USD 7,000.
President Trump also took aim at the Federal Reserve, breaking the convention that the president does not comment on interest rates. In a tweet, Trump wrote that ‘tightening now hurts all that we have done’, which followed comments on CNBC that he was ‘not thrilled’ with the monetary tightening underway.
UK Prime Minister was in Belfast, Northern Ireland, on Friday, where she called for the EU to ‘evolve its position’ on the issue of the Irish border and the trade agreement proposed in her Brexit white paper released last week. While EU Brexit negotiator Michel Barnier said he would consider changes to the proposal the EU has previously put forward, he continued to voice scepticism over much of the white paper’s contents, including whether the UK’s proposal to enjoy a free trade deal was compatible with maintaining the integrity of the EU single market.
The three-day state visit of Chinese President Xi Jinping to the UAE over the weekend led to the signing of 13 memoranda of understanding between the two countries. Alongside Chinese investment in the oil sector, there will also be increased cooperation in transport and logistics and related infrastructure, as part of China’s One Belt One Road development initiative.
Source: Bloomberg, Emirates NBD Research
Treasuries ended the week marginally lower as the discourse shifted from the testimony of Fed Chairman Jerome Powell to the tweets of Donald Trump expressing displeasure with the Federal Reserve’s interest rate increases. The curve steepened with the spread between the 2y UST and 10y UST widening for the first time since June to 30 bps from 24 bps at the end of the previous week. Eventually, yields on the 2y UST, 5y UST and 10y UST closed the week at 2.59% (+2 bps w-o-w), 2.76% (+4 bps w-o-w) and 2.89% (+7 bps w-o-w) respectively.
Regional bonds drifted marginally lower but continued to trade in a tight range. The YTW on the Bloomberg Barclays GCC Credit and High Yield index closed the week at 4.47% (+3 bps w-o-w) and credit spreads remained flat at 175 bps.
In terms of rating action, S&P affirmed the ratings of the Emirate of Sharjah and Emirate of Ras Al Khaimah at BBB+ and A respectively but revised the outlook on rating of Ras Al Khaimah to negative from stable. The rating agency said that the negative outlook reflects the risk that the government’s fiscal position may weaken beyond its current projections.
Tweets from Donald Trump talking down interest rates and the dollar, and accusing China and the EU of currency manipulation were the main developments at the end of last week, reversing the dollar’s strength of earlier in the week. The dollar fell broadly with the Bloomberg Dollar spot index falling by 0.8% on Friday, taking EURUSD and GBP higher, while USDJPY fell back with speculation also this morning that BOJ policy makers are becoming concerned about the sustainability of its emergency monetary policy. The weekend G20 Finance Ministers Meeting in Buenos Aires has helped calm some of the currency concerns with US Treasury Secretary Mnuchin reinforcing the US’ longstanding commitment to a strong USD, and indicating that the US will not seek to intervene to depress the USD.
Regional equities started the week on a mixed note. The DFM index and the Qatar Exchange lost -0.2% and -0.6% respectively while the Tadawul managed marginal gains.
Doha Bank lost -5.3% after the bank reported a 75% decline in Q2 2018 earnings to QAR 89mn. The bank attributed the decline to sharp increase in loan loss provisions related to branches in GCC countries. The net impairment loss on loans and advances to customers increased to QAR 448mn in H1 2018 from QAR 131mn in H1 2017.
Oil closed last week lower than the week previous, with Brent futures settling at USD 73.07/b, down 3.0%, while WTI declined by a lesser 0.8% to USD 70.46/b. That being said, both contracts closed up on Friday compared to the previous day, likely owing in part to comments by US President Donald Trump talking down the dollar.
Another likely contributing factor to the pick-up in prices seen at the close of the week was a statement by Saudi Arabia’s OPEC governor that it would take the foot off the gas in terms of boosting its exports, and that ‘Stable and balanced markets are the ideal market form for both producers and consumers, and just as Saudi Arabia would not like to see unmet customer demand, an oversupplied market repels potential investment in the oil industry, curtailing future supply and contributing to volatility.’
Performance of GCC bonds and sukuk in 2018
UAE card spending up 8.5% in Jan-Oct 2018