Trade war fears remain to the fore

Stock markets are still looking weak as renewed fears over a US-China trade war remain to the fore. US President Donald Trump has been following up the incendiary tweet he made on Sunday with repeated assertions that China ‘broke the deal’. As it stands, tariffs on USD 200bn of Chinese goods are set to be hiked from 10% to 25% on Friday, and China has promised retaliatory measures. Chinese Vice Premier Lie He is in Washington for talks, and President Trump told supporters at a rally yesterday that ‘it will all work out’, but in the meantime uncertainty remains.

There was some improved data out of Germany yesterday, following the worse-than-expected factory orders numbers released on Tuesday. Industrial production expanded 0.5% m/m in March, compared to expectations of a -0.5% decline. Nevertheless, on an annualised basis production declined -0.9%, and while this exceeded expectations of a -2.6% fall, it is indicative of a German economy under pressure.

UK Prime Minister Theresa May appears to be secure in her job for now, following a meeting with Conservative Party colleagues on Wednesday. Negotiations over a new Brexit deal continue with the opposition Labour Party, and while talks do not appear to have made significant progress, there has been speculation that a new deal could be brought before parliament to vote on before European elections on May 23. UK house average prices saw a robust 1.1% m/m expansion to GBP 236,619 in April, exceeding analyst expectations of flat growth of just 0.1%, and a substantial improvement on the 1.6% decline seen last month. The UK housing market has been quite thin since the Brexit vote in 2016, with buyers and sellers alike remaining on the sidelines, but positive employment figures and persistently low interest rates have supported the sector.

Asia stocks under renewed pressure

Source: Bloomberg, Emirates NBD Research

Fixed Income

Notwithstanding the uncertainty surrounding the US-China trade talks, yield on US treasuries widened yesterday. Also the bid-to-cover ratio for yesterday’s sale of 10-yr treasury notes was the lowest since 2009 – possibly either because the corporate bonds look more appealing in a strong economy or may be because China’s buying of USTs may have reduced. Yields on 2yr, 5yr, 10yr and 30yrs USTs closed higher at 2.30% (+2bps), 2.29% (+3bps), 2.48% (+2bps) and 2.89% (+3bps) respectively. In contrast, sovereign bonds in the Europe had a bid bias. Yields on 10yr Gilts and Bunds closed at 1.13% (-2bps) and 0.046% (-1bp) respectively. CDS levels reflected the trade war worries with CDS spread on US IG and Euro Main each widening by 1 bp to 62bps and 63bps respectively.

In sync with widening benchmark yields, GCC bonds closed marginally down. Yield on Bloomberg Barclays GCC index increased by a bp to 3.97% and credit spreads increased by 3bps to 159bps.

In the primary market, Bahrain is believed to be meeting global investors in preparation for raising/refinancing through the bond market in the second half of this year. Five year CDS spread on Bahrain increased 4bps to 261bps yesterday while those on other GCC sovereigns remained largely unchanged.

FX

Safe haven demand for the JPY is keeping USDJPY heavy amidst the ongoing trade dispute between the US and China. President Trump’s claims that ‘China broke the deal’ were seen reducing the chances of a compromise when the two sides meet from today.  The JPY rose 0.15% against the USD over the last day, and is up 1.44% over the past week. Meanwhile the pound weakened against most currencies over the last day, as Brexit fatigue weighed on it, dropping 0.7% since the start of the week.  

Equities

Global stocks continued to tread on slippery grounds amid volatile news flow relating to the US – China trade talks. S&P 500 lost another 0.16% yesterday and Asian bourses are under pressure with Nikkei and Hang Seng down by a significant 1.01% and 1.95% in early morning trades today. That said, Europe seems to be shrugging off the trade fears with FTSE 100 and Euro Stoxx 50 closing up by 0.15% and 0.47% respectively.  ASX 200 is also up 0.42% this morning.

Regional GCC markets were slightly weaker amid weakened oil prices. Dubai index was down 0.4%, owing mainly to the hit on real estate shares and Tadawul closed down by 0.8% yesterday. Abu Dhabi exchange, however, closed flat amid trade value of nearly AED 1 billion, nearly 8 times the 30 day average volume. 

Commodities

Brent futures rose 0.7% yesterday to USD 70.4/b, while WTI saw even greater gains of 1.1% to USD 62.1/b, bolstered by news that US crude inventories shrank by a greater-than-anticipated 4mn barrels in the week to May 3. However, this has not been sufficient to maintain Brent at over USD 70.0/b, as renewed trade concerns on Thursday have pushed the benchmark back down to USD 69.8/b at the time of writing.

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