PMI data out of the Eurozone suggests the economy is performing strongly in the final months

PMI data out of the Eurozone suggests the economy is performing strongly in the final months of the year. The final composite PMI figure of 57.5 was an acceleration from October and was at its highest level since 2011. New orders and backlogs of work—an indicator of robust domestic demand—helped push the PMI figure higher. At the same time consumer confidence in the Eurozone hit a 16 year high in November. Overall the data suggests a healthy end of the year for the Eurozone economy and will reassure the ECB that it can ease up on some stimulus measures next year.

In contrast, the UK services PMI data showed a slowdown m/m in November, hitting 53.8 from 55.6 a month earlier and weaker than the market had been expecting. The index was still comfortably in positive territory, backing up good figures from the manufacturing and construction industry. However, forward looking expectations were more downbeat, particularly as the outlook for Brexit remains highly uncertain. At the same time, companies have been charging higher prices which may undermine the Bank of England’s views that inflation pressures are only exchange rate related.

In the US, the ISM non-manufacturing index slowed in November to 57.4 from 60.1 a month earlier, still a robust pace and setting the economy up for a good end of 2017. New orders and overall business activity still held quite strong and the employment component of the survey points to healthy levels of job growth, which should be confirmed by the non-farms payroll out at the end of this week.

Australia’s economy expanded by 0.6% in Q3 from the prior three months and was up 2.8% on the same period a year earlier. Business investment was the main contributor to growth last quarter as household consumption only nudged higher, up 0.2%. The Reserve Bank of Australia kept interest rates on hold earlier in the week at 1.5% as it will be eager to see household spending pick up in the coming months to help set growth in the country on a solid and sustainable footing.

Eurozone PMIs at highest level since 2011

Source: Emirates NBD Research

Source: Bloomberg, Emirates NBD Research. 

Fixed Income

UST curve flattened further as chatter surfaced about possibility of a 50bps hike instead of 25bps at the Fed’s meeting next week. Yields on 2yr UST climbed 2bps to 1.82% while those on 10yr and 30yr USTs declined 2bps to 2.35% and 3bps to 2.73% respectively – partially attributed to softer than expected ISM non-manufacturing PMI data yesterday.  Local GCC bond market had little catalyst for change with yield and credit spreads on Barclys GCC index closing unchanged at 3.54% and 131bps respectively.

In sync with the recent downgrade of the Bahrain sovereign rating to B+ by S&P, rating on Bahrain Telecom was cut to B+ from BB- by S&P yesterday. BATEL 20s fell to their lowest level this year with yield rising 7bps to 4.97%.

In the primary market, Emirates REIT priced its BB+ rated (by Fitch) $400 million  5yr sukuk at 5.125%. An order book in excess of $975 million helped bring the price down from the IPT of 5.25%.

FX

AUD underperforms this morning after softer than expected economic data. GDP slowed to 0.6% q/q in Q3 2017 from 0.7% the previous quarter, missing out on market expectations for 0.7% growth. As we go to print AUDUSD trades 0.33% lower at 0.75823, having hit lows of 0.75719 earlier in the Asia session. We expect the next level of support to be the 38.2% one year Fibonacci retracement (0.7529) and the next level of resistance to be the 50% one year Fibonacci retracement (0.7643), a level last breached on 13 November 2017.

This morning’s outperformer is JPY which is benefitting from safe haven bids due to the negative performance of Asian equity markets. Currently USDJPY is trading 0.352% lower at 122.22. We expect strong support circa the 111.65 level (the 38.2% one year Fibonacci retracement and close to the 200 day moving average of 111.68 and 100 day moving average of 111.50. A break of this level exposes the cross to further declines towards 110 (the 23.6% one year Fibonacci retracement and a psychological level). On the upside, we see the first level of resistance at 112.82, the 50 day moving average which has unsuccessfully been tested for the last three consecutive trading days.

Equities

Some softness in commodities prices and negative chatter around the tax bill in the US led global equity bourses to generally close in the red yesterday. S&P 500 was down -0.37% , FTSE 100 down by -0.16% and DAX closed lower by -0.08%. Asian equities are also trailing lower this morning.

Following its international peers, regional equity bourses in the GCC also declined amid profit taking ahead of the year end. Abu Dhabi Exchange led the losses, closing down by 1.46%, followed by DFM at -1.11% mainly as a result of softness in banking and property shares. Softness in banking sector was also the main reason behind Tadawul’s -0.54% decline while Kuwait and Qatar fell by quarter of a percentage point.

In the UAE primary market, the book for IPO of the Adnoc’s Unit is progressing well with the target to list on December 13.

Commodities

Oil prices ticked up yesterday, WTI gaining 0.26% and Brent up 0.66% but they are on a downward path in early trading this morning. API figures out overnight showed a build in product stocks last week and a decline in crude inventories. EIA data out later tonight expects a similar trend but not quite to the degree that the API reported.

Price moves were far sharper in the metals complex. Copper prices fell more than 4% on the LME while the rest of the base metals complex moved sharply lower. Iron ore prices lost more than 1.6%. The weakness is likely a result of some investment flowing out of commodities as economic data out of China still points to reasonably healthy, if not bliserting, levels of growth.

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