SAMA's net foreign assets decline by USD5.5bn in March

Focus will remain on the White House with the Trump administration still having work to do to prevent a government shutdown. After the House passed a seven-day stopgap spending bill last Friday, a bipartisan deal has emerged over the weekend on a USD1.1 trillion agreement that will keep the government open until September.  The deal has not been voted on yet, but it appears to support many of the priorities of the Democratic Party while pushing back against many of President Trump’s policies including financing for a border wall with Mexico.

Geopolitical tensions are also on the rise with North Korea again testing ballistic missiles over the weekend, and Trump warning about all options being on the table in terms of a possible response. After weaker than expected Q1 GDP data released on Friday, showing the economy grew by an annualized 0.7%, the focus will be on the FOMC meeting outcome on Wednesday  and payrolls data on Friday. Despite the soft GDP data we think the Fed is still keeping its options open to tighten monetary policy in June, especially as inflationary trends are rising. Fed comments through April generally supported forecasts for two more rate hikes this year and the statement will likely be consistent with this approach.   

Data released over the weekend showed SAMA's net foreign assets declined by USD5.5bn in March to USD 501.4bn.  The decline in NFAs in Q1 is a little surprising given the rise in oil prices and the issue of a USD9bn sukuk in March; which suggests that outflows on the balance of payments remain substantial.  Private sector credit declined -0.1% y/y despite a 0.4% m/m rise in March, while public sector credit growth also slowed to 39.3% y/y. 

The IMF will this week begin reviewing Egypt’s progress under the USD12bn extended fund facility signed last November. Egypt abandoned currency controls on November 3^rd in accordance with the agreement and has also made progress in terms of implementing other structural reforms with regards to reducing subsidies and introducing VAT. The main challenge would seem to be reducing inflation which has risen to above 30% in the wake of the devaluation of the EGP.    

Monthly change in SAMA's net foreign assets

Source: Bloomberg, Emirates NBD Research

Source: Bloomberg.

Fixed Income

Despite weaker than expected 1Q GDP data in the US,  UST curve recorded bear flattening during the week with yields on 2yr and 10yr treasuries rising to 1.26% (+3bps) and 2.28% (+1bp) respectively. Though yields on 10yr Gilts followed suit with the USTs, up 3bps during the week to 1.08%, safe haven Bunds and JGB remained well bid with yields closing down by a bp each to 0.31%  and 0.002%  respectively.

DM cash corporate bonds were range-bound during the week since credit spreads had a slight tightening bias. Locally, though there was volatility in some high beta names such as TAQA, EAPART, Dana Gas etc, the Barclays GCC bond index closed largely unchanged with credit spreads tightening by 4bps to 132bps amid stable oil prices.

No new deal was priced during the week though Saudi Arabia’s  International Co. for Water and Power Projects, also known as ACWA Power rated BBB-/Baa3, has mandated banks to raise circa $600m senior secured 144A/Reg S bond offering.

FX

The dollar has improved on the back of a tentative USD1.1 trillion spending agreement that will keep the US government open until September. The pound dropped following the agreement, having last week reaching a six-month peak at 1.2959 and closing at its highest weekly closing level since September. London markets will be quiet for May bank holidays, but markets will be carefully watching the progress of the US budget agreement to see if it can pass through Congress in time to replace the 7-day stop-gap deal passed last week.  

Equities

Asian equities are trading higher this morning on the back of strength in Japanese equities. The Topix index was trading +0.3% at the time of this writing.

Saudi Arabian equities ended the month on a positive note with the Tadawul adding +1.0%. The broad index was propped up by strength in petrochemical stocks following better than expected results. Saudi Kayan closed limit up after reporting a profit of SAR 265.5mn for Q1 2017 compared to a loss a year back. Safco rallied +0.7% after reporting better than expected earnings.

Commodities

Oil markets managed to hold relatively steady last week, keeping losses limited to around 0.6% for WTI futures and 0.4% for Brent. Nevertheless both contracts remain under negative technical pressure, staying below their 100- and 200-day moving averages since April 19th. Consistently constructive comments from OPEC officials—the latest from the Iranian oil minister saying an extension of output cuts is gaining ground—have failed to stimulate any recognizable upward movement in prices and instead the market appears ready to break downward. Heaping on the pressure, the drilling rig count in the US continues to move higher, adding nine rigs last week and now just shy of 700 targeting oil. The forward curve continues to oscillate in and out of backwardation but Brent December spreads closed at a backwardation of USD 0.33/b for 2017/18. 

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