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Published Date: 02 September 2019
The United States and China went ahead with their latest tariff increases effective yesterday. The latest tariffs will now directly hit consumer goods ranging from technology products to footwear and apparel. The resultant increase in prices is likely to feed into US consumer spending which has so far remained resilient. According to data released last week, nominal personal spending rose by +0.6% in July relative to growth of +0.3% in June 2019. While the spending data remained strong, some weakness may be starting to creep in as shown by the University of Michigan’s consumer sentiment index which dropped to 89.3 in August from 98.4 reading in July. This was the largest monthly decline since 2012.
On the Chinese side, the impact of tariffs is already visible. According to data released by the National Bureau of Statistics and China Federation of Logistics and Purchasing, the manufacturing PMI in August remained in contraction territory with a reading of 49.5 (versus 49.7 in July). However, non-manufacturing PMI showed a slight pick-up with a reading of 53.8 compared to 53.7 in July.
India’s GDP growth for Q1 FY 2020 came in significantly weaker than expected at 5.0% y/y. This was the slowest pace of growth in last six years. The growth was dragged lower by industry which grew at 2.7% y/y compared with 9.8% y/y last year. Within the industrial segment, the stress was visible in manufacturing sector which grew at a modest pace of 0.6% y/y. The overall reading is broadly in line with high frequency data and indicative of the need for both the government and the Reserve Bank of India to continue to stimulate the economy.
On its part, the Government of India seems to have understood the severity of the slowdown and has over the last fortnight announced a series of measures to improve growth. As part of that process, the government over the weekend announced the merger of 10 state-owned banks into four, effectively bringing down the number of state-owned banks to 12 from 27. The move was also accompanied by details of approximate capital infusion by the government into each bank and several governance reforms. We expect the government to announce further measure over the next few weeks in an accelerated attempt to arrest the downturn.
Source: Bloomberg, Emirates NBD Research
Treasuries ended the week higher amid mixed signals from the trade front and economic data. Yields on the 2y UST, 5y UST and 10y UST ended the week at 1.50% (-3 bps w-o-w), 1.38% (-3 bps w-o-w) and 1.49% (-4 bps w-o-w).
The ongoing Brexit process had limited impact on Gilts which closed flat w-o-w. Elsewhere in the Eurozone, Italian bonds rallied sharply following an agreement between parties to form a new coalition government. Yields on the 10y Italian government bonds dropped below 1% to 0.99% (-32 bps w-o-w).
Regional bonds continue to benefit from drop in benchmark yields. The YTW on Bloomberg Barclays GCC Credit and High Yield index dropped -8 bps w-o-w to 3.07% and credit spreads tightened 5 bps w-o-w to 158 bps.
According to reports, Abu Dhabi plans to issue USD-denominated bonds this year. The issue size may be at least USD 1bn and proceeds will likely be used for general budgetary purposes.
Last week the dollar gained against a basket of currencies, the Dollar Index (DXY) rising by 1.20% to close at 98.807, the highest weekly close since May 2017. In the medium term, the index looks likely to retest the 2019 highs of 99.023, the risk of which remains likely while the index continues to realizen weekly closes above the 76.4% one-year Fibonacci retracement (97.794).
On the other side of the Atlantic, a 1.44% decline resulted in EURUSD closing below the 1.10 level, for the first time since May 2017. Closing the week at 1.0982, EURUSD has closed below the 23.6% five-year Fibonacci retracement (1.1006). While the price remains below this level, a larger decline towards 1.08 remains a distinct risk.
Regional equities started the week on a mixed note with weakness bias. The ADX index and the Tadawul lost -0.9% and -1.3% respectively. Weakness in banking stocks dragged the Tadawul lower with Al Rajhi Bank and National Commercial Bank losing -2.6% and -3.5% respectively.
Elsewhere, Egyptian equities continued their positive run. The EGX 30 index added +0.7% to take their year to date gains to +14.5%.
Oil markets could not escape the maelstrom that captured nearly all risk assets in August, with both Brent and WTI futures recording sizeable declines. Brent futures fell 7.3% for the month while WTI ended the month down almost 6%. A combination of new tariffs being imposed by China and the US, weakening data from major economies and uncertainty over the next steps from central banks all worked to weigh on the outlook for crude oil, particularly for demand in the coming months. Despite these major macro headwinds, oil prices managed a weekly gain as large inventory draws in the US helped to support prices.
OPEC production rose in August, thanks to higher output from Iraq and Nigeria and negligible declines elsewhere. Saudi Arabia’s production levelled off at 9.63m b/d, down only slightly month/month while output in the UAE was unchanged at 3.07m b/d, according to Reuters data. Compliance with the December 2018 production cut agreement remains high: collective compliance is at 135%, down from 162% a month previously. Saudi Arabia continues to enormously over-deliver, hitting 311% compliance with its targets, while the UAE is producing roughly exactly on target. Iran’s oil production was estimated at 2.1m b/d, down 1.45m b/d y/y as sanctions take their toll.