RBNZ stays on hold

The Reserve Bank of New Zealand (RBNZ) kept its benchmark rate on hold as expected this morning at 1.75%.  However, the post-meeting statement struck a surprisingly dovish tone, with the RBNZ saying that it expected interest rates to remain at the current level for an extended period as inflation was expected to slow to just 1.1% in Q1 2018 (from 2.2% in Q1 2017). The RBNZ is concerned that premature monetary tightening could undermine growth.  Following the statement, the NZD fell to its lowest level in 11 months, trading at USD0.68 as of this writing.

Market focus today will likely be on the Bank of England’s MPC meeting and May inflation report, where a more dovish tone is also expected.  At the last MPC meeting, there was one dissenter who voted for a rate hike.  Since then, Q1 GDP growth has come in lower than forecast and the pound has appreciated to just under USD1.30.  We also get UK industrial production, manufacturing production and construction output data for March today. 

Yesterday’s French and Italian industrial production numbers were better than expected, with French IP rising 2.0% m/m (2.0% y/y) in March compared with a forecast of 1.0% m/m (0.6% y/y). Friday’s key data releases will be from the US, where CPI, retail sales and the University of Michigan sentiment index are due. 

In Saudi Arabia, the deputy minister of economy and planning said in an interview with Bloomberg that the government would look to issue international bonds again this year, most likely in Q4, and also planned to raise SAR 70bn (USD18.6bn) in the domestic market.  Mohammed Al Tuwaijri said the government had also identified 16 entities for privatisation. Several of these were already ready at an “advanced stage” of the privatisation process, according to the report.  

NZD weakens to 11-month low

Source: Emirates NBD Research, Bloomberg

Source: Bloomberg.

Fixed Income

Latest upheaval in Washington failed to have much impact on treasuries. UST yields continued to rise in preparation for the anticipated interest rate hike next month. Yields on 2yr and 10yr UST closed a bp higher each to 1.35% and 2.41% respectively. Lack of material news in Europe left sovereign bond yields mostly range-bound albeit with a yield tightening bias with 10yr Bunds closing in at 0.42% (-1bp).

Though treasuries have fallen, cash corporate bonds were supported yesterday due to slight tightening of credit spreads. CDS levels on US IG closed a bp tighter at 62bps and those on Euro Main closed unchanged at 63bps.

Locally GCC bonds had an uneventful day. Mild widening in benchmark yields got counterbalanced by tightening in credit spreads. OAS on liquid UAE bonds closed at 122bps (-3bp) and those on Barclays GCC bond index closed at 125bps (-1bp). Secondary market trading in OMGRID 27s saw slight uptick in price with spread over treasuries closing at 260bps vs the reoffer level of 278bps.

In a corporate developments, TAQA posted its first profit in more than 24months and Saudi government hinted that Aramco IPO may be delayed if market price isn’t constructive.

FX

NZD underperforms in the aftermath in of the RBNZ (see above). As we go to print, NZDUSD currently trades 1.45% lower at 0.6840, levels not seen since June 2016. Today’s move has also taken the pair below the one year 23.6% Fibonacci retracement, which paves the way for a retest of the 12 month low of 0.6676.

Following two days of gains, the Dollar Index is trading slightly lower this morning at 99.63, above the 200 day moving average of 99.28 and below the 50 day moving average of 100.15. We expect this range to hold until further news or developments causes on break or another.

Equities

Developed market equities closed marginally higher even as it continued to trade in a very tight range. A rebound in oil prices following the US inventory data provided some support.

Trading in regional equities continues to remain sluggish. The DFM index dropped -0.4% while the Tadawul added +0.2%.

Saudi Electricity rallied +2.2% after the company reported a profit of SAR 4.94bn for Q1 2017. DXB Entertainments dropped -5.0% after the company said Q1 2017 losses widened to AED 287.4mn.

Commodities

Oil markets bounced back strongly in response to the weekly EIA data, helping both Brent and WTI futures close up 3% and taking Brent back above USD 50/b. Total crude stocks drew by 5.2m bbl and gasoline, distillates and residual fuel also declined. Domestic production still maintained its upward trend, expanding by 21k b/d in the last week while total crude and product exports fell. The improvement in spot prices helped spreads tighten although the market still remains in a contango structure. 

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