Firm economic data and further progress on the tax reform bill combine to create hawkish sentiment l

Stronger than expected employment data, higher annualized hourly wage growth and further progress on the tax reform bill – all combined to create a sentiment of hawkishness last week. The UST curve reversed some of its previous month’s flattening bias with 2yr, 5yr, 10yr and 30yr yields closing at 1.79% (-2bps), 2.14% (unchanged), 2.38% (+1bp) and 2.77% (+1bp) respectively.  Risk on sentiment fueled demand for credit causing CDS levels on US IG and Euro Main to close lower during the week at 51bps (-2bps) and 48bps (-2bps) respectively.

Corporate bonds across the globe had a week of range-bound trading ahead of the meetings of the three major central banks this week (Fed, BoE and ECB). Activity in the local GCC bond market was also muted with no major event and minimal new issue during the week. Barclays GCC index closed with yields unchanged at 3.54%, though credit spreads were a touch wider at 131 bps (+1bp) during the week.

In compliance with the OPEC oil production cuts agreement, output from Saudi Arabia, the biggest producer within OPEC, dropped 40,000 barrels a day to 9.97 million a day over the month of November. However, output in Iraq, the second-biggest producer within OPEC, recovered by 40,000 barrels a day to 4.39 million a day, as some disruptions were resolved in Kurdistan region. Nevertheless, Oil traded on firmer grounds as OPEC and some non-members including Russia decided on Nov. 30 to extend their deal to curb production until the end of next year.

Higher oil prices are expected to reduce the government budget deficits next year and is the main reason behind better profits for likes of SABIC and TAQA this year. SABIC earlier had reported 3Q net profit of SAR 5.79 billion, materially ahead of expectations of SAR 4.11 billion and plans to expand its investment in the JV with Sinopec in China.

News about EU blacklisting 17 countries including Bahrain and UAE as tax havens lacking transparency and compliance with WEU standards is not expected to have material impact on the local markets as at now as there is no imposition of sanctions or restrictions apart from limiting access to EU development fund.

GCC vs EM IG bonds and US IG bonds - OAS history (%)

Source: BloomberEmirates NBD Research

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