21 February 2022
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UAE and India sign comprehensive economic agreement

By Daniel Richards

  • The UAE and India signed a comprehensive economic partnership agreement on Friday, which will boost bilateral trade and investment between the two countries.  90% of the trade between the UAE and India will be duty free, including gems and jewellery, pharmaceuticals, plastic products and autos. The deal will facilitate the UAE becoming a hub for Indian exports to the wider European and MENA region.
  • Comments by Fed officials on Friday appeared to confirm that the FOMC will likely raise rates at the March meeting, but some seemed less convinced about the need for an aggressive 50bp hike in the first instance.  New York Fed President John Williams in particular said he didn’t see a compelling argument for a “big step” at the start of the tightening cycle, but that balance sheet reduction could start earlier and at a faster rate than in the previous cycle. Markets have pared their bets on a 50bp hike in March, partly due to heightened geopolitical tensions in Eurasia. 
  • Key US data this week includes the second estimate of Q4 GDP and the Fed’s preferred measure of inflation, the core PCE deflator (Thursday).  PMI data (Tuesday) will indicate whether supply chain issues have improved in January or not and the University of Michigan consumer sentiment index (Friday) will provide the latest reading on household inflation expectations.
  • Retail sales in the UK rose by a faster than expected 1.9% m/m in January, reversing some of the decline in December 2021.  Relaxation of covid restrictions in the UK by the end of January may have helped boost retail spending.  However with household incomes under pressure from higher energy costs and other inflation, as well as higher taxes from April, the outlook for retail spending is not encouraging.
  • Japan’s flash PMIs for February signalled a slowdown in the manufacturing sector (52.9) and a steeper contraction in the services sector (42.7) relative to January. The composite PMI fell to 44.6 from 49.9 in January after the government reimposed some measures to contain the spread of the Omicron variant of coronavirus earlier this month. The measures have been extended into early March, but infection numbers are starting to decline.

Today’s Economic Data and Events

13:00 EC Flash composite PMI (Feb) forecast 52.9

13:30 UK Flash composite PMI (Feb) forecast 55.3

Fixed Income

  • US Treasuries managed to record a week of modest gains as a risk-off tone related to the geopolitical situation in Eastern Europe hangs over markets. A broad index of USTs rose for the first time in four weeks last week with gains spread across much of the curve. Yields on the 2yr UST fell 3bps to 1.4654% while the 10yr held relatively stable at around 1.93%.
  • Bonds in Europe showed similar moves higher as investors moved into haven assets. Yields on the front end of the German curve fell sharply, down almost 15bps to -0.483% while the 10yr bund yield sank 10bps to 0.19%. In the UK investors seemed to push back against the threat of rate hikes with yields on both the 2yr and 10yr gilt falling sharply.
  • Emerging market bonds though were sold off in the broad risk-off move. An index of USD denominated EM bonds fell for a fourth week running, down 0.4% last week. In local currency markets though bonds performed better. South African bonds gained with yields on the 10yr down 12bps to 9.493% while Indian yields fell almost 4bps to 6.665%.

FX

  • The dollar closed relatively steady at the end of a choppy week. The broad DXY index showed essentially no change over the five days but is being sold off in early trade today as hope grows for a diplomatic resolution to the tension in Eastern Europe. EURUSD fell 0.25% last week to 1.1322 but is showing signs of strength in trade today. A constructive easing of tensions would likely be near-term positive for the Euro. USDJPY closed last week down by 0.36% at 115.01 with the yen buoyed by haven bids.
  • GBPSUSD managed to gain 0.18% last week even amid the drop in gilt yields. High inflation in the UK have all but made certain the Bank of England will carry out monetary policy tightening this year, and likely at an aggressive pace.
  • In the commodity currencies, USDCAD edged higher as oil prices came off the boil. The pair settled at 1.2752, up 0.12% last week. AUDUSD added 0.6% to 0.7177 while NZDUSD moved up 0.75% at 0.6697.

Equities

  • Equity markets were under concerted pressure last weeek as a combination of geopoliticla tensions and tightening bets weighed on stocks. Almost all major global indices closed lower over the week, with some European markets faring esepcially poorly. In Germany, the DAX closed down -2.5% w/w, while the UK's FTSE 100 lost -1.9% for its worst week since November.
  • There was a similar story in the US, as the S&P 500, the NASDAQ and the Dow Jones lost -1.6%, 1.8% and 1.9% respectively.
  • By contrast, local equity markets closed the week higher. The Tadawul added 3.6% w/w, while the ADX (1.7%) and the DFM (2.1%) also had strong weeks.

Commodities

  • Oil prices fell for the first time since mid-December 2021 as a mix of profit taking, hope that a diplomatic resolution in Eastern Europe will ease tensions and the prospect of a restart of the Iran nuclear deal all weighed on markets. Brent futures fell almost 1% to USD 92.85/b and are being sold off in early trade today while WTI closed last week at USD 91.07/b, down more than 2% with another 0.6% being given up today. However, time spreads still point to considerable tightness in the market with the 1-2 month Brent spread around a backwardation of USD 2/b while the same spread in WTI is around USD 1.30/b.
  • Saudi Arabia’s energy minister committed OPEC+ to “consensus building” in their approach to market management while his counterparts from the UAE, Kuwait and Iraq all said they should continue to add output on a slow pace to avoid blowing markets back into surplus.
  • Long Brent and WTI positions fell last week with total speculative net length in both contracts down by more than 4,300 units. Net length has fallen in the last four weeks as high oil prices likely prompt some profit taking.

Click here for charts and tables

Written By

Daniel Richards Senior Economist

Edward Bell Head of Market Economics

Khatija Haque Head of Research & Chief Economist


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