FOMC minutes showed a difference of opinion

The minutes of the June FOMC showed a difference of opinion about when the Fed should start to shrink its balance sheet, although there was consensus that the move should start before year-end provided the economy continued to perform as expected.  Some members of the FOMC would like to see the Fed start to unwind QE in a “couple of months” while other members preferred to wait until later in the year to see how inflation evolves.  While the Fed’s baseline view is that the current softness in inflation is transitory, some in the FOMC believe that tightening monetary policy too soon could jeopardise a return to the Fed’s 2% inflation target.  Nevertheless, there is still consensus on the interest rate trajectory and we continue to expect one more 25bp rate hike this year. 

The market’s focus today will likely be on the release of the June ECB meeting.  Retail sales and Eurozone services PMI data released yesterday were both encouraging, with the former rising 0.4% m/m and the latter beating expectations to rise to 55.4 in June.  This follows better than expected manufacturing PMI data released earlier this week.  The UK’s services PMI in June was broadly in line with expectations at 53.4 but lower than the May reading of 54.3. 

In the US, the ADP employment data is expected to show 185k new jobs added in the private sector in June, down from 253k in May; official non-farm payrolls data will be released tomorrow.  The services PMI and ISM non-manufacturing index are also due this evening.  Yesterday’s US factory orders (May) was a little softer than forecast at -0.8% m/m and weaker than the April reading.       

Fixed Income

It was a rather whipsaw day of trading for US Treasuries as early session gains were pared following the Fed minutes which showed the central bank remains on track to start unwinding its balance sheet. The minutes also showed a fair bit of discussion around the trajectory of inflation in the US. Eventually, yields on the 2y USTs dropped -0.5% to 1.40% and on the 10y USTs declined -1.1% to 2.32%.

Regionally, the sharp decline in oil prices and resurfacing of geo-political tension weighed on investor sentiment. The yield on the Bloomberg Barclays GCC Credit and High Yield index rose 2 bps to 3.6% with the spread widening by 3 bps to 166bps. Issues around Qatar remains an overhang as it became apparent that there is unlikely to be an early resolution. The 5y Qatar CDS rose for the first time in four days to 117. Following its decision to revise the outlook on Qatar’s ratings, Moody’s also revised lower the outlook on ten Qatari banks to negative.

Dana Gas is scheduled to hold its first conference call following the company’s decision to declare its sukuk illegal. The DANAGS 9s is currently trading around 79.0 while DANAGS 7s is trading around 80.0 level. 

FX

USD is softer across the board, with the JPY the main beneficiary of increased geopolitical tension globally. 

In Asia, the PKR depreciated more than 3% yesterday to 108.095/USD, the weakest level since December 2013.  The move is likely to restore some export competitiveness and help to tackle the widening current account deficit, which has more than doubled y/y in the 11-months to May.

Equities

Developed market equities closed marginally higher as gains in financial stocks helped offset the losses in energy-related stocks. The S&P 500 index and the Euro Stoxx 600 index added +0.2% each.

Regional markets traded mixed with the Tadawul losing -0.5% and Qatar Exchange adding +0.4%. Turnover continues to remain light. Interestingly, much of the action on the DFM index and the Qatar Exchange came during the auction period. For example, Emaar Properties traded nearly one-third of its total volume during that time.

In terms of stocks, Almarai and Savola dropped -2.6% and -5.4% respectively. Arabtec paused its recent trend of gains as the stock lost -1.2%.

Commodities

Oil prices sold off sharply yesterday as markets moved to a risk-off tone in response to heightened geopolitical risks in north Asia. Brent closed down -3.6% and WTI was off -4.1%. Earlier on Wednesday, Russia's president, Vladimir Putin, said he did not support further cuts by OPEC members and Russian adherence to the production cut arrangement seemed set to fade by 2018 in any case.

Oil prices are recovering this morning after API reported a drop in crude and gasoline stockpiles last week. Weekly EIA data has been delayed by a day thanks to the public holiday in the US earlier this week and will be released this evening.