Cabinet reshuffled in the UAE

• UAE Prime Minister and Dubai ruler Sheikh Mohammed bin Rashid Al Maktoum announced ministerial changes on Saturday, including new finance and environment ministers. Sheikh Maktoum bin Mohammed bin Rashid Al Maktoum has been appointed deputy prime minister and finance minister for the UAE. Mohammed bin Hadi Al Husseini replaces Obaid Humaid Al Tayer as the minister of state for finance, and Maryam Al Muhairi becomes the minister of climate change and environment. Suhail Mohamed Al Mazrouei remains energy minister, but also takes on the role of infrastructure minister on the back of the merger of both ministries. HH Sheikh Mohammed announced the reshuffle as part of a new government strategy aimed at speeding change through "transformational projects" in the Emirates.
• Bloomberg reports that Bahrain will double its VAT rate to 10% as it seeks to diversify its revenue away from oil and narrow the budget deficit. Further consolidation of expenses is also planned with a view to achieving a balanced budget by 2024.  Last year, Saudi Arabia tripled its VAT rate to 15% to partially offset the impact of sharply lower oil prices on the budget. Bahrain’s GDP reportedly grew 5.7% y/y in Q2 21, with non-oil growth accelerating to 7.8% y/y, up from -2.1% y/y in Q1 21.  Bahrain’s economy contracted -9.5% in Q2 2020 at the peak of the pandemic restrictions.
• The Turkish central bank cut the one-week repo by 100 bps at its Thursday meeting, taking the benchmark rate to 18.00%, and real interest rates further into negative territory (CPI inflation was 19.3% in August). Consensus expectations had been for another hold, but the stated shift towards core inflation targeting earlier in the month had raised speculation in the weeks prior to the meeting that the bank would cut rates. The bank’s communiqué attributed the recent rise in inflation to transitory supply-side factors and stated that tight policy was having ‘a higher than envisaged contractionary effect on commercial loans.’ The Turkish lira weakened to 8.7530 against the dollar following the meeting before sinking even further at the end of the week.
• Sales of new US single-family homes rose 1.5% m/m to a seasonally adjusted annual rate of 740,000 units last month, rising for second straight month in August.  July's sales pace was revised to 729,000 units from the earlier reported 708,000 units. Sales increased 6.0% m/m in the South and gained 1.4% m/m in the West. Sales also rose sharply 26.1% m/m in the Northeast but tumbled 31.1% m/m in the Midwest. Sales decreased 24.3% y/y basis in August. New home sales in the US to post significant gains since surging to a rate of 993,000 units in January, which was the highest since the end of 2006. Builders have been constrained by higher prices for inputs, as well as shortages of land and labor. 78% of homes sold last month were either under construction or yet to be built. Demand for housing could cool after the Federal Reserve said on Wednesday it would likely begin reducing its monthly bond purchases as soon as November and signaled interest rate increases may happen more quickly than expected.

Today’s Economic Data and Events

15:45     EU ECB President Lagarde Speaks                             

15:45     EU ECB President Lagarde Speaks                             

16:30     US Core Durable Goods Orders (MoM) (Aug) Forecast 0.50%       

22:00     GB BoE Gov Bailey Speaks                           

Fixed Income

• As the curtain falls on the era of pandemic-induced easy monetary policy, bond markets are readjusting. In a week heavy with central bank action, the FOMC took centre stage and all but confirmed November 2022as to when tapering of asset purchases will begin and also pointed to the possibility of rates going up in 2022, earlier than previously indicated. But the Fed wasn’t the only actor, with the Bank of England also giving indications that it was preparing to tighten policy due to mounting inflation pressures affecting the UK economy. In the background, at least for developed markets, Norges Bank raised rates by 25bps and lined up another hike for December.
• After an initial muted response to the Fed’s messaging of tighter policy ahead, US Treasuries sold off heavily toward the end of the week, with yields jumping considerably on Sept 23 rd. All told the curve bear steepened over the week with 2yr UST yields up 5bps to 0.2695%, their highest level since March 2020, while 10yr yields jumped to 1.4509% over the week, adding 9bps. Gilts showed a similarly aggressive move with 2yr gilt yields up 9bps to 0.377% and the 10yr yield adding 8bps to 0.9240%.
• The advent of tighter US monetary policy is weighing on emerging markets too. An index of USD-denominated emerging market bonds fell 0.9% last week, its sharpest weekly decline since March 2021, while aggregate yields for the index added 14bps to 4.09%, their highest level since November 2020. Local currency emerging bonds showed a similar, downward move.
• In India, yields on 10yr local currency government bonds rose moderately while South African yields added almost 15bps to 9.471% as the SARB kept rates on hold at yet another central bank meeting last week. Turkish bond yields jumped with the 2030 TRY yields up 123bps to 17.7% as the central bank there cut, rather than raised rates, amid enormous inflation pressures.
• Egypt priced USD 3bn in a triple tranche issue toward the end of last week. A USD 1.125bn 6yr note priced at 5.8%, a USD 1.125bn 12yr at 7.3% and USD 750m in 30yr at 8.75%.

FX

• From a week that started with anxiety that the default from a major Chinese property developer could spark a global financial crisis to an end with the lining up of tighter US monetary policy it should be no surprise that the dollar rallied last week. That said, the gains were relatively limited with the DXY index rising 0.14% to 93.327. We expect to see persistent strength in the dollar, particularly against negative-yielding Euro and yen, both of which declined against the dollar last week: EURUSD fell 0.04% to 1.1720 while USDJPY added 0.7% to settle back up above 110.73.
• GBPUSD declined over the course of the week as risk-off tone accounted for more than the BoE’s hawkish tone on inflation. The pair fell 0.45% to 1.3679. We still expect to see strength in sterling over the end of 2021 and into next year albeit at a moderate pace of gains.
• Commodity currencies were mixed with both AUD and NZD falling heavily at the end of the week and declining on the week as a whole: AUD fell 0.04% to 0.7262 while NZD sank almost 0.4% to 0.7015. CAD was the relative outperformer among the commodity currencies with USDCAD falling 0.9% to 1.2652 as energy markets rallied strongly.

Equities

• Equity markets withstood the shock from the Evergrande financial crisis and implication of tighter US monetary policy with relative sangfroid. The S&P 500 added 0.5% last week with gains in the Dow (0.6%) too. The tech-oriented NASDAQ was roughly stable with a moderate upward bias. European markets rallied over the week too with the resource-intensive FTSE 100 adding 1.3% while the EuroStoxx index gained 0.6%.
• Asian markets were most acutely caught up by the Evergrande crisis with the Hang Seng falling nearly 3% last week and the Nikkei off by 0.8%.
• In local markets the DFM index fell 2% last week while the Abu Dhabi exchange index fell 0.7%. The Tadawul was similarly weaker, falling by 1.3% over the week.

Commodities

• Oil prices continue to benefit from the near-term tightness in the market and general anxiety around energy supply, particularly in Europe. Brent futures added 3.7% to USD 78.09/b while WTI closed just shy of USD 74/b, a gain of 2.8% last week.
• The European energy crisis is playing out substantially in natural gas markets with NBP prices rising for a fifth week in a row, up 12.6% last week, while LNG prices also remain strongly bid, holding near record levels around USD 27/mmBtu.
• Gold prices fell a third week running amid the prospect of tighter US monetary policy and higher yields. Gold settled down 0.22% on the week to USD 1,750/troy oz while the rest of the precious metals complex was mixed; silver and platinum rallied while palladium was offered.
• Industrial metals largely shrugged off the anxiety around the Chinese property sector with gains in most of the LME complex of base metals. Iron ore managed to snap its recent losing streak, up 3.3% to settle at USD 118/tonne.

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