UAE central bank extends part of TESS to June 2022

• The UAE Central Bank announced an extension to parts of the Targeted Economic Support Scheme (TESS) which was introduced last March to provide support to businesses and households during the pandemic. The AED 50bn zero cost loan facility for banks to draw on to boost lending to sectors affected by the pandemic has been extended to end-June 2022, while the central bank’s financing for loan deferrals under TESS will be extended to end-2021.  Both measures had been due to expire at the end of June this year. The central bank indicated last month that drawdown of the zero-cost loan facility had fallen to AED 22bn, compared with the peak drawdown of AED 44bn in Q2 2020, indicating that borrowers had paid back many of the loans under the program as their businesses recovered from the impact of the pandemic.  However, the recovery has been uneven, and the extension of these programmes will continue to provide support to those businesses and sectors that still need it.
• The Q1 ECB lending survey showed that demand for bank credit declined in Q1 in the eurozone while banks tightened lending standards.  While this was likely due to renewed restrictions across the region in response to rising coronavirus cases, weaker lending growth will likely weigh on a recovery.
• UK unemployment declined to 4.9% in the three months to February from 5.0% in January, as the furlough scheme continues to protect jobs.  However, unemployment is expected to rise once the furlough scheme expires at the end of September.

Today’s Economic Data and Events

10:00 UK CPI (Mar) forecast 0.4% m/m and 0.8% y/y

18:00 Bank of Canada rate decision: forecast 0.25% (unchanged)

Fixed income

• Yields continued to push lower overnight as investors dumped risk assets in favour of havens. Most of the gains in the UST market were led by the long end of the curve with 10yr yields down more than 4bps to close at 1.5589% with another move down this morning. Yields on the 30yr were also lower by around 4bps. Yields at the front end did fall although not nearly as much with 2yr USTs down by less than 1bps at 0.1492%.
• Federal Reserve chair Jerome Powell did say that the US will experience “a little higher Inflation” in a letter to a US senator but the Fed wasn’t looking for inflation above 2% for a “prolonged” period. Political concern over the pace of price gains could put some pressure on the Fed but we believe it will stick to its arguments as viewing any inflation bump this year as transitory and will thus push back on any premature tightening of policy.
• Emerging market local currency bonds generally bore the brunt of the risk-off move with yields higher across most markets. Turkish 10yr bond yields added 26bps to push up to 17.48% while Brazilian 10yr bonds also saw a more than 20bps jump in yields. In India, yields were broadly steady at around 6.07% despite the parabolic rise in the number of Covid-19 cases and more lockdowns being imposed across the country.

FX

• The dollar managed to snap its losing streak overnight with the DXY index adding 0.2% to settle at 91.241. However, the gains were relatively muted across most major peers. EURUSD drifted higher toward the middle of the day before sinking in US trading hours with the market focusing in on the ECB later this week. USDJPY showed a mirror image of the Euro’s behaviour though, with the Yen weakening early in the day before gaining against the dollar and now pushing below the 108 level.
• Sterling drifted generally lower, down by 0.35% but still remains near multi-week highs at over 1.39. Meanwhile commodity currencies were weaker across the board with CAD losing 0.6%, AUD down 0.4% and the NZD off by 0.14%.   

Equities

• Equities were on the back foot yesterday as concerns over surging Covid-19 cases in major economies such as India and Japan, and a potential extension of international travel restrictions as a result, weighed on sentiment. India’s major equity markets the SENSEX and the Nifty lost -0.5% and -0.4% respectively, somewhat more muted contractions compared to recent days. In Japan however the Nikkei lost -2.0% yesterday and is trading down a further -2.2% so far this morning.
• Elsewhere, travel and tourism stocks were particularly affected, and these helped drive down the UK’s FTSE 100 which lost -2.0% yesterday. There were similarly large losses elsewhere in Europe, where the DAX lost -1.6% and the CAC -2.1%. In the US, the NASDAQ was the biggest loser (-0.9%) followed by the Dow Jones (-0.8%) and the S&P 500 (-0.7%).
• Within the region the DFM closed -0.3% lower while the Tadawul gained 0.2%..

Commodities

• Oil prices stumped overnight with Brent down 0.7% at USD 66.57/b, WTI off almost 1.5% at USD 62.44/b and Murban sinking 1.2% to close at USD 65.02/b. The rising number of Covid-19 cases in India, and the potential for the strain there to move across borders and force lockdowns, is weighing on near-term optimism across assets, not just oil.
• Also not helping was a report from the API which showed a build in US crude inventories of 436k bbl last week. The build is relatively modest and markets will be looking for official confirmation from the EIA later this evening.