Total crude production from OPEC rose 250k bpd in May

Inflation in the Eurozone slowed in May to 1.4% y/y from 1.9%, below the market's expectation of a slowdown to 1.5%. Core inflation including more volatile components such as food and energy also slowed to 1% in May from 1.2% previously. The soft inflation figures may firm up ECB governor Draghi's view that "accommodative" financing conditions will need to remain in place for the Eurozone, even as the market prepares for a more assertive statement at next week's ECB meeting. More constructive, however, was a tick down in the Eurozone unemployment to 9.3% in April from 9.4% a month earlier.

India’s GDP for Q4 FY 2017 came in lower than expected at 6.1%. While the full year FY 2017 growth came in line with expectations at 7.1%, it was lower than FY 2016 growth of 8.0%. The latest data clearly suggests the lingering impact of demonetization with construction sector growth declining by -3.7% compared to 3.4% in the previous quarter and manufacturing sector growing at 5.3% compared to 8.2% in the previous quarter. The data was also impacted by the base effect following upward revisions to previous year data.

The Caixin China manufacturing PMI showed a contraction for May, diverging from the government's own statistics which showed steady output month on month. The Caixin survey takes into account smaller firms than the government's measure which suggests that large SOEs have been responsible for keeping China's growth steady this year but raises concerns about how sustainable that growth can be if stimulus or accommodative financial conditions are withdrawn.

Total crude production from OPEC rose 250k b/d in May according to a Reuters survey. Output from Saudi Arabia and the UAE ticked higher by 30k b/d and 10k b/d respectively while the biggest increases came from Libya (180k b/d) and Nigeria (130k b/d). Total compliance with the production targets remained high at 95% but we would expect to see that slip further over the summer months as output seasonally moves higher.

Demonetization impact lingers on in India's economy

Source: EIKON, Emirates NBD Research

Source: Bloomberg.

Fixed Income

San Francisco Fed President’s John Williams commented that 3 rate increases is the base, but if economy strengthens, 4 times would be appropriate left sovereign bonds  trading weaker across the developed world. Yields on 2yr and 10yr US Treasuries rose to  1.29% (+1bp) and 2.21% those on 10yr Bunds and Gilts closed at 0.30% (+1bp) and 1.04% (+5bps) respectively.

Average credit spreads on local GCC Bonds rose by a bp to 134bps, however overall bond prices remained stable with total yield to worst declining a bp to 3.23%

Activity in the primary market is thin. In market news, ENBD yesterday launched a sukuk index capturing global USD denominated sukuk (excluding murabaha). The index reflects 17% return over the last four years i.e circa 3.7% per annum which is similar to the total return on conventional bonds in the region.

FX

Despite stronger than expected retail sales in April, AUD is underperforming this morning and has softened against all the other major currencies. Economic data showed that retail sales had risen 1% m/m in April compared with market expectations of 0.3% growth. Despite this, AUD softness has been catalysed by a weaker than expected PMI from China (see above), Australia’s largest trading partner. As we go to print, AUDUSD trades 0.4% lower at 0.7400, remaining in the daily downtrend that has been in effect since March 21^st. We expect further declines at these levels with a break below 0.7396 (the one year 38.2% Fibonacci retracement) to be imminent, followed by further declines towards 0.73. A break of this level would take the pair to the lowest level seen January 2017 and pave the way for more significant declines. On the other hand, a daily close above 0.7469 would nullify our view and indicate possible trend reversal.

Equities

Developed market equities closed marginally lower following weak revenue guidance from US banks and continued weakness in oil prices. The S&P 500 index lost -0.1% while the Euro Stoxx 600 index declined -0.2%.

It was a mixed day of trading for regional equities with the Tadawul closing flat and the Qatar Exchange losing -1.6%.

Ezdan Holding dropped a further -9.3% as investors continue to pare their position following a preliminary approval by shareholders to delist. Dana Gas jumped +5.1% following fresh reports of the company continuing to pursue legal option in relation to its dues from KRG.

Commodities

Oil markets were again off heavily yesterday despite comments from the Saudi and Russian energy ministers, pledging cooperation to bring inventories down to their five-year average. Prices have managed to claw back some ground after the API data showed a large draw of 8.7m bbl last week, which was to be expected ahead of the Memorial Day long weekend in the US. If confirmed later tonight by the EIA oil markets may hold some ground but generally the tone of the market appears to be seeking bearish rather than bullish catalysts.

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