Economic data reflects fragile investor sentiment

Existing home sales in the US dropped 8.5% to a seasonally adjusted annual rate of 5.27 million units in March. This marked the sharpest decline since 2015. The data reflected contracts signed in February or as far back as January, before measures to curb the spread of the virus sapped the economy. Thus the figures are likely to deteriorate further in the months to come as the impact measures to control the spread of the coronavirus bite. The National Association of Realtors said it expected a sharper decline in sales in April and the few months ahead, derailing the normally busy spring selling season. While steps by the Fed to cut interest rates to near zero, will keep mortgage rates low, that is unlikely to boost the housing market on the back of record unemployment and collapsing consumer confidence.

The labour market data from the UK, though dated, showed that the jobs market was softening even before the announcement of lockdown measures. While there was a 172,000 rise in employment in three months to February 2020, the ILO unemployment rate rose to 4% from 3.9% and the headline earnings growth dropped to 2.8% from 3.1%. Further, the claimant count rate increased from 3.4% to 3.5% in early March. While the government’s job retention program may help to stave off significant damage to the labour market, it is still likely to be insufficient. According to reports, the UK government has paid 80% of the wages of over 1 million furloughed workers amounting to GBP 1.5bn on the first day of the scheme.

The ZEW survey out of Germany painted a more mixed picture. While the current condition component (-91.5 versus -43.1 in the previous month) of the survey plummeted to the lowest in more than a decade, the expectations component for the next six months (28.2 versus -49.5 in the previous month) climbed to the highest level since mid-2015. The trend was similar in the wider Eurozone ZEW survey and perhaps a reflection of some recent moves in some European countries including Germany to ease lockdown measures.

German ZEW survey shows fledgling signs of confidence in economic outlook

Source: Emirates NBD Research

Fixed Income

Treasuries closed mixed as risk-off sentiment gathered further pace. Gains were led by the long-end which sharply flattened the 2s10s and 5s30s spreads. Yields on the 2y UST remained flat at  0.20% while on the 10y USTs it dropped -4 bps to 0.57%.

Regional bonds remained under pressure. The YTW on Bloomberg Barclays GCC Credit and High Yield index rose to 4.39% (+7 bps) and credit spreads widened further to 382 bps (+10 bps).

Dana Gas plans to use proceeds from the sale of its Egyptian assets to pay the outstanding USD 397mn sukuk maturing in October 2020. However, the deal has been impacted by the pandemic and the company said it is in no position to provide guidance on any timeline for the deal to be completed.

S&P revised the outlook on Islamic Arab Insurance Co’s ratings to negative from stable. Elsewhere, Saudi’s ACWA Power International plans to raised as much as USD 1bn from a sukuk sale.

FX

It was a volatile day for the dollar index despite breaking the 100.00 barrier amid prevailing risk aversion in global markets. It is currently trading at 100.230 and buyers will look to push beyond the 100.500 and 101.00 mark. USDJPY was largely unchanged, and even after experiencing a downside key reversal the currency remains close to Monday’s closing price at 107.75.

The Euro was largely bearish after Monday’s relatively flat movement. It experienced a downturn for the majority of the day and finished very close to its starting price at 1.0850. Sterling declined to a near two week low amid negative sentiment regarding Brexit (with UK-EU transition talks restarting this week), dropping by over 1.15% to reach 1.2295. Similarly the AUD and NZD declined by over -0.30% and -0.90% respectively as commodity currencies underperformed.

Equities

Developed market equities closed sharply lower as continued collapse in energy prices laid bare the challenges global economy is facing at the moment, The impact of the sharp decline in oil pirces was also felt in the ETF market with the biggest crude tracking fund (USO) in the US suspending the sale of new shares. The S&P 500 index and the Euro Stoxx 600 index dropped-3.1% and -3.4% respectively.

Regional markets too saw broad-based sell-off with financial and petrochemical stocks taking the biggest hit. Saudi Electricity Co dropped -3.1% even as the company got a waiver to not pay dividends for the Public Investment Fund’s 74.31% stake in the company. The waiver was granted  to ensure the company’s financial and operational sustainability.

Commodities

Oil prices remained under extraordinary pressure overnight following WTI’s close at the start of the week in negative prices. June WTI futures settled down 43% at USD 11.57/b and are attempting to push higher this morning while Brent fell more than 24% to close at USD 19.33/b. Volatile price action will likely characterize trading in the short term, with wide intraday moves.

Forward curves likewise remain dreadful. Time spreads in 1-2 month WTI are still over USD 7/b while in Brent they are wider than USD 4.53/b in contango as traders and producers panic over the lack of available storage. API data revealed another mega build in US crude stocks of 13m bbl last week.

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