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Last week ended with the focus largely on politics, with the stability of the new White House in question, and with electoral risks in the EU also mounting. This week will see the minutes of the February FOMC meeting released but it is unlikely that these will add much colour beyond what Yellen said last week in her testimony to Congress. A March rate hike still looks unlikely overall but the balance of risks is shifting towards one happening sooner than June which has been the consensus expectation. Elsewhere in the Eurozone attempts to resolve Greece‘s debt problems are continuing with a Eurogroup meeting today seeking to finalize the latest tranche of loans so that Greece can meet a EUR7bn payment due in July.
Today will be a quiet day across markets as the US will be closed for the President’s day holiday, but overnight in Asia Japan’s trade balance for January was released and revealed a bigger than expected deficit of –JPY1.1 trillion, after a surplus of JPY640.4 billion in December. The data showed exports struggling relative to expectations rising just 1.3% y/y, and falling 6.6% to the US, which was a surprise following a relatively strong performance in Q416.
The Central Bank of Egypt voted to keep interest rates unchanged at its latest meeting on 16 February, with the overnight deposit and lending rates remaining at 14.75% and 15.75% respectively. Before the meeting, there was some speculation that the CBE could raise rates, as core inflation jumped to 30.9% y/y in January. The bank last raised rates in November by 300bps following the move to devalue the Egyptian pound. As the majority of the price spike has been caused by a combination of the EGP devaluation and a rise in administered prices, there is little that monetary tightening can achieve to anchor inflation at this stage. Given the recent appreciation of the EGP (trading around 16.14 at the end of last week) and reports of ongoing rises in foreign capital inflows, the CBE is unlikely to raise rates in the near term.
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Source: Emirates NBD Research, Bloomberg.
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| Time | Cons |
| Time | Cons |
| German PPI y/y | 11:00 | 2.0% | EC Consumer Confidence | 19:00 | -4.9 |
| UK CBI Trends Total Orders | 15:00 | 4 |
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Treasury curve flattened to accommodate negative international headlines including French political woes, concerns around the Greece debt and soft UK economic data. Yields on 2yr and 10yr UST closed at 1.19% (-1bp) and 2.41% (-4bps) respectively and those on 10yr Gilt and Bund were down by 5bps each to 1.21% and 0.30% respectively. Core Eurozone had a tightening bias though yields on periphery sovereigns continued to get higher due to Greece debt concerns.
Despite slight increase in oil prices, credit spreads were range bound with slight widening bias. US IG and Euro Main CDS levels closed at 64 bps (unchanged) and 75bps (+1bp) respectively. Investment grade cash corporate bonds closed in the green, however global high yield bonds lost some ground as credit spreads widen under the pressure of strengthening dollar’s impact on EM economies.
Though there was no clear catalyst, credit spreads on GCC bonds widened during the week as investors remained reluctant to raise capital prices in line with lower benchmark yields. BUAEUL index closed with YTW at 3.06% (+3bps over the week) and OAS at 143bps (+5bps over the week).
Despite the slight widening bias during the week, CDS levels on GCC sovereigns are close to their post financial crisis lows. Abu Dhabi 5yr CDS spreads closed at 50bps (vs lowest of 40bps in June 2014), Dubai at 126bps (vs 155bps in June 2014) and Saudi Arabia at 104bps (vs 40bps in June 2014).
In the primary market, KIPCO priced its 10 yr $500 million bond at MS + 210bps with a simultaneous tender of its existing 2019 bonds. The new issue was four times oversubscribed. The Dubai government is believed to be considering a dollar denominated benchmark offering within this quarter.
GBP was caught off guard late last week by a surprising fall in January UK retail sales,-0.3%, following on from a revised -2.1% drop in December. This brought the pound further off its highs after earlier in the week stumbling on softer than expected inflation data. The second estimate of Q4 GDP is due out this week and may be revised slightly higher from the first 0.6% estimate, which could help to stabilize sterling. However, the focus is now more on the current year and the CBI survey data for February (today) may be a truer test for the pound.
Asian equities are trading marginally lower this morning as investors lock in their recent gains. The Nikkei index was trading -0.1% at the time if this writing.
It was an uneventful start to the week for regional equity markets. The Qatar Exchange closed +0.9% while the ADX index dropped -0.5%.
In terms of stocks, focus remained on construction sector with both Arabtec (-3.9%) and Drake & Scull (-2.6%) dropping further. Shuaa Capital gained +6.7% on optimism over the company’s new strategy which includes an acquisition.
Oil prices declined over the week seeing WTI close down 0.9% and Brent futures giving up nearly 1.6%. Nearly two months into the year oil prices have settled into a tight range as volatility has plummeted. Both Brent and WTI has moved less than USD 5/b between their year-to-date highs and lows compared with around USD 7/b for the same period in 2016. The week ahead will be shaped by announcements coming out of IP Week in London which may give some indication of expectations for whether OPEC will roll-over its production cuts into the second half of the year.
Emirates NBD Research
