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Last week saw the release of Q4 U.S. GDP data which came in below expectations, with growth slowing to 1.9% q/q annualized, and down from 3.5% in Q3. This brought full-year growth for 2016 to 1.6%, marking the slowest pace in five years. The Q4 figure was dragged down by the trade sector, although there was more positive news from stronger growth in household consumption and business investment. The concern is that the new Trump administration might take this Q4 GDP data as evidence of the need for a more protectionist trade policy, which the withdrawal from the Trans Pacific Partnership, threat to renegotiate NAFTA, and ongoing discussion surrounding the imposition of a border-adjustment tax with Mexico all seem to suggest is likely.
The week ahead will be busy from a data perspective, with important figures released in the U.S., Europe and Asia. In addition to an FOMC meeting (no change expected) the main focus will be on the latest U.S. nonfarm payroll survey, which is expected to recover slightly from December’s report that showed a relatively modest 156k new jobs added. European data will include Q4 Eurozone GDP and January inflation, in addition to a range of manufacturing surveys, while Friday will see the publication of the latest China Purchasing Managers’ Index.
Turkey lost its last investment grade sovereign credit rating on 27 January, after Fitch Ratings downgraded its long-term FX rating to BB+ from BBB-. Moody’s had previously downgraded Turkey to non-investment grade status in September 2016. According to a statement released by Fitch, the main driver behind the rating downgrade was the political and security environment, which has undermined economic growth and raised questions about institutional independence. Although the decision by Fitch was not entirely unexpected, a more surprising development came on the same day when Standard & Poor’s announced it was revising its outlook on Turkey’s BB rating to negative from stable.
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Source: Emirates NBD Research, Moody's, S&P, Fitch
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| Time | Cons |
| Time | Cons |
| German Inflation (y/y) | 17:00 | 2.0% | US Personal Income | 17:30 | 0.4% |
| US Personal Spending | 17:30 | 0.5% | US Core PCE (y/y) | 17:30 | 1.7% |
Treasury yields ascended and the UST curve steepened mildly last week in response to Trump’s swift action on his campaign promises. Yields on 2yr treasuries closed at 1.22%, 8bps higher than their opening level on Monday while those on 10yr climbed 9bps during the week to 2.48%. Following similar trend, sovereign yields escalated materially across the Eurozone area - ranging from 33bps increase to 4.07% for Portugal to 10bps increase to 0.46% for the German Bunds last week.
Oil prices oscillated in a narrow range during the week, finally closing 0.5% higher at $55.5/b. Against this backdrop, GCC bond prices remained range-bound with credit spreads tightening and benchmark yields widening. BUAEUL index closed with YTW of 3.12% (+1bp) and OAS of 144bps (-3bps).
Towards the end of the week, S&P affirmed rating on Ras Al Khaimah at A/stable, citing expectation of continued fiscal surplus, economic growth of circa 3% in this year and continuation of support from the federal government. In contrast Sharjah’s rating was downgraded by one notch to BBB+/stable as the emirate recorded fiscal deficits larger than anticipated and debt rising to circa 17% of GDP in 2016 vs the previous expectation of 14% of GDP. Impact of these rating changes on their respective bond prices is yet to be seen. The current yield on RAKS 25s at 3.45% appears good value compared with SHARSK 24s at 3.40% given the two rating category differential albeit with 6 month longer maturity.
Primary market this week is expecting further info on DIB’s proposed Tier 1 sukuk offering and update on Abu Dhabi’s trip to Asia to garner investor support for a possible sovereign issue.
The markets open with USD underperforming as investors continue to contemplate the effects of slowing Q4 GDP 2016 (see above) on the Fed’s tightening plans for monetary policy. Thus far, the dollar index has declined 0.3% to 100.23, effectively paring the previous week’s gains. While the dollar will remain vulnerable amid uncertainty and tighter than normal liquidity (due to Chinese absence over the Lunar New Year holiday), further losses may be limited by strong support within the 99.20-99.56 zone, which ranges between the 100 day MA for the index (99.56) and the one year 61.8% Fibonacci retracement (99.27).
Asian equities are trading lower this morning in thin trading as most markets are closed. The Nikkei index was trading -0.8% at the time of this writing.
Regional equities had a mixed day of trading with the UAE bourses (DFM index -1.0%, ADX index -0.8%) drifting lower and the Tadawul (+0.7%) closing higher. This was in line with the trend seen last week.
The KWSE index added a further +1.3% to tale its year to date gains to +21.0%. The government is expected to announce details of its long-term economic development plan.
In terms of stocks, Maaden rallied +5.3% after the company made public the progress in expanding its phosphate and bauxite operations. Gulf Finance House, most traded stock on the DFM, closed limit down.
Oil prices managed to eke out a small weekly gains as the market balanced compliance with OPEC's production cut agreement with a buoyant US oil industry. Brent futures closed the week at around USD 55.50/b while WTI managed to hang on to levels above USD 53/b. Net length in speculative WTI positions hit a new record level last week, brought about by long positions rather than cuts to short positions, which had been the case up to the end of 2016. Producers continue to take advantage of supportive prices, adding both short positions (hedges) and drilling rigs, now at their highest since November 2015.
Emirates NBD Research
