Geopolitics continue to weigh on markets

Geopolitical tensions escalated heading into and during the long Easter weekend.   On Thursday, the US dropped its biggest non-nuclear bomb on an ISIS stronghold in Afghanistan, while on Sunday, North Korea tried and failed a test to launch a ballistic missile.  US Vice-President Mike Pence landed in South Korea on Sunday evening amid heightened tensions on the peninsula as part of his first official Asia Pacific tour, which will also include visits to Japan and Australia this week.  China has urged both sides to avoid escalating the situation.  

Meanwhile in Turkey, President Recep Tayyip Erdogan won Sunday's referendum on 18 constitutional amendments that would strengthen his position and could extend his term in office to 2029. The referendum won approval of 51.3% to 48.7% of Turks, though opposition parties are alleging fraud and the European Union branded it as unfair. The Turkish Lira is up 2.5% against the dollar already and is expected to make further gains in the coming days after losing more than 25% in the last one year. The referendum win puts a question mark on Turkey’s aspiration to join the EU which may not accept a constitution that does not respect separation of power and has no checks and balances in place.

China's economy expanded 6.9% y/y in Q1 vs market expectations of 6.8%. All sectors of the economy are trending higher with retail sales growth at 10.9%, Industrial output rose 7.6%, fixed asset investments was up 8.1% and property construction spending was also higher by 9% y/y. Consumption contributed 77.2% to growth in the first quarter, pointing to further rebalancing of the economy away from an export led model.

Most developed markets were closed on Friday, although US inflation and retail sales data was released. US CPI declined -0.3% m/m in March, against forecasts of no change, while core CPI (excl food and energy) declined -0.1% m/m.  Retail sales were in line with expectations at -0.2% m/m.

Day's Economic Data and Events

Source: Bloomberg

Fixed Income

Softer inflation and retail sales data out of the US dragged down the possibility of a June rate hike to 57% from 63% in the previous week. US treasuries curve also flattened with yields on 2yr, 5yr, 10yr and 30yr UST closing materially lower  at 1.21% (-6bps), 1.77% (-13bps), 2.24% (-13bps) and 2.89% (-10bps) respectively and continuing to recede further this morning. In an Easter holidays shortened week, yields on the Euro area sovereign bonds were also lower as geopolitical concerns continued to mount. 10yr Gilt and Bund yields were down to 1.04% (-3bps) and 0.18% (-2bps) respectively. Credit spreads had mild widening bias amid prevailing uncertainty and sustained flow of new issues.

GCC bonds closed the week at all-time high, driven mainly by the receding benchmark yields and high demand for GCC bonds. International investors’ focus is firmly on the GCCC region particularly as several emerging market economies such as Russia, Brazil, South Africa, Turkey etc have recorded economic challenges and rating downgrades in the recent past. Though average option adjusted credit spreads on liquid UAE bonds widened 8bps to 142bps during the week, they are not too far from their all-time lows of 118bps in mid-2014. 

In the primary market investors await details of the deal from Oman sovereign which mandated banks two weeks ago for a benchmark sized dollar denominated offering.

FX

Amid thin liquidity, USD showed slight depreciation on Friday with the Dollar Index declining 0.05% to 100.51. This close to the week shows further vulnerability in store for the index as its technical outlook appears fragile. Having initially appreciated at the start of the week, the index found strong resistance at the 100 day moving average (101.135) but enjoyed strong support at the 50 day moving average of 100.78. Of note is that the 50 day MA has acted as a former resistance that gave way and became a new support on the 7^th of April.

However, this new support gave way on the third attempt on the 12^th of April and the index closed below this key level for two consecutive days. This leads us to expect further weakness and we see a break of the 100 level paving the way for a descent towards 99.20.

Equities

Regional equities made a negative start to the week as regional and global geopolitical factors weighed on investor sentiment. The Tadawul and the DFM index dropped -1.0% and -1.6% respectively.

Banking stocks in Saudi Arabia declined after a lawsuit was filed in the US Court by more than two dozen US insurers affiliated with Travelers Cos. to hold companies in Saudi Arabia responsible. Al Rajhi Bank and NCB dropped -2.3% and -2.4% respectively.

Dana Gas dropped -4.4% after the board noted that the company remains under severe cash constraints. Elsewhere, National Bank of Kuwait rallied +1.5% after reporting an 8.1% increase in Q1 2017 net profit to KWD 85.4mn. 

Commodities

Oil markets were little changed in a shortened week of trading as all the major forecasting agencies expected supply conditions from non-OPEC producers to balance against an expected extension of OPEC's supply cuts. Exploration and production companies in the US continued to add rigs, up 11 last week, taking the total to the highest since early 2015. 

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