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In the US new orders for durable goods advanced 1.7% in August, much stronger than the consensus estimate of a 1.0% increase. This gain follows a 6.8% decline in July. The increases in new orders and shipments last month were broad-based, with outsized gains in motor vehicles and parts, which may have stemmed from anticipation of hurricane-related damage. Orders of computers and electronics were strong, mostly a function of Apple’s latest iPhone. These trends, combined with higher demand for electrical equipment, metals and machinery needed for reconstruction efforts in Texas, Florida, Louisiana, and other related areas, is expected to bolster economic growth in the second half.
Overhauled tax plan tabled in the US senate yesterday proposed material changes including sizeable cuts in corporate and individual tax rate, repealing of estate tax and increasing deductible expenses etc. Corporates will be afforded write-off of capital expenditure for at least five year. The proposed tax plan could cost the government up to $3tn. But this is just an initial proposal and, if the passage of earlier large tax bills is any guide, the tax cuts will be scaled back before a final bill is passed.
Saudi Arabia raised $12.5bn from its second dollar bond sale this year as the kingdom bolsters its finances amid an economic overhaul. The government sold $3 billion in five and half year notes, $5 billion of the 10.5 year tranche and $4.5 billion of the 30-year offering. In addition to the current offering, the Saudi government has previously raised circa $18.8 billion in debt via issuance of 37 billion riyals ($9.8bn) worth of bonds in the domestic SAR denominated market and $9 billion in USD denominated sukuk done earlier in the year, taking the total public debt raising this year to $31.3 billion which will be used to fund circa $53 billion of budget deficit projected for this year.
Source: Emirates NBD Research
Treasuries drifted lower as speculation over the tax reform plan continued to weigh. The curve steepened with 5s30s ending the day wider by 4 bps. Overall, yields on the 2y USTs increased by 4 bps to 1.47% and on 10y USTs by 8 bps to 2.31%.
While another issue from the Kingdom of Saudi Arabia weighed on the regional bond markets, it tended to track moves in benchmark yields. The YTW on the Bloomberg Barclays GCC Credit and High Yield index increased by 3 bps to 3.48% even as credit spread tightened by 3 bps to 159 bps.
Saudi Arabia raised USD 12.5bn from its second USD bond sale this year. The government sold USD 3bn in 5y, USD 5bn in 10y tranche and USD 4.5bn in 30y tranche. The 5y, 10y and 30y were priced 110bps over USTs, 145bps over USTs and 180 bps over USTs respectively. Yields on the current 26s rose 6 bps to 3.47%.
Dollar strength persisted yesterday thanks to better than expected data out from the US. CAD was a significant loser against the greenback as the fizz is coming out of the recent oil rally while GBP failed to move higher despite the Bank of England’s chief economist saying the MPC was getting close to deciding on withdrawing some stimulus from the market.
As we go to print, the Dollar Index currently trades at 0.26% higher at 93.61. This potential rise for a fifth consecutive day as well as the two previous closes above the 50 day moving average (92.904) reinforce the possibility of the current reversal of the daily downtrend persisting. The most likely scenario ahead is for further gains towards 94.03, the 23.6% one year Fibonacci retracement.
Developed market equities closed higher amid speculation that Donald Trump will manage to push through the tax overhaul code this year. The S&P 500 index and the Euro Stoxx 600 index gained +0.4% each.
It was a relatively weak day of trading for regional equities with all major indices drifting lower. The Qatar Exchange gave up almost all its recent gains with the index losing -1.7%. Elsewhere it was rather quiet amid lack of corporate news flow.
A mixed picture for oil markets following this week’s EIA data. Brent futures closed down 0.9% and are now trading back below USD 58/b while WTI managed to sneak higher, closing just a little over USD 52/b. EIA data showed a draw in overall crude stocks of 1.8m bbl while gasoline stocks built, suggesting the effects of hurricanes at the end of August are now well behind the market. US production rose 37k b/d last week to more than 9.54m bbl.
The backwardation in the Brent curve persists but has tightened marginally, particularly on Dec spreads. Nevertheless with calendar 2018 strips holding above USD 56/b we suspect there will be some eager hedging activity as producer seek to take advantage of higher prices.
Emirates NBD Research
