UAE expects growth of 3.5-4% in 2017

Factory orders in the US rose in January, their second consecutive month of expansion. Total factory orders rose 1.2%, building on a similar sized expansion in December and showing the manufacturing industry in the US is in robust health in the first few months of the Trump administration. All eyes in the sector will now be on any changes that could be coming to US tax law, with the Republicans in Congress proposing a root and branch revision of US corporate tax rates.

Conditions across Lebanon’s private sector economy continued to deteriorate in February according to the latest Purchasing Managers’ Index (PMI). The headline reading came in at 47.7, matching January’s survey. Slight declines were seen in the Output (45.6) and New Orders (45.7) components, while Export Orders (49.8) and Employment (49.9) rose to multi-month highs, and are now only marginally below the no-change 50 level. The Future Output Index, which is meant to gauge business sentiment, fell to only 41.6, and has declined every month since reaching a 27-month high in November. This is an interesting development as November marked the start of a stabilization in the political environment, following the election of a president and subsequent formation of a government.

The UAE’s minister of economy expects real GDP growth of 3.5-4% in 2017, from an estimated 3.7% in 2016. This year’s forecast is in line with our house view. The minister cited supportive oil prices in recent months and infrastructure projects as factors driving growth this year.

The RBA left interest rates unchanged at 1.5% today, as widely expected by the market. The RBA cited varying conditions for housing across Australia and an eventual tick up in inflation as cause for keeping rates on hold at this time while also pointing out that an overly strong AUD would complicate the country's 'economic adjustment'.

RBA trying to keep AUD contained

Source: Bloomberg, Emirates NBD Research

Source: Bloomberg.

Fixed Income

It was a day of consolidation after Janet Yellen's comments on Friday and cash bond markets were a beneficiary of a slightly risk-off tone, although most gains were muted. EM bonds were among the biggest movers although the lack of vibrancy to oil markets kept gains underwhelming.  Yields on 10-year USTs were slightly higher yesterday, closing just under 2.5% after having flirted briefly with levels higher earlier in the day.

Regionally, the BUAEUL index closed essentially flat with a moderate upward bias while the OAS widened 1bp to 130.29. Qatar Re priced a USD 450m perp at 4.95%, tighter than its initial guidance thanks to a large demand for the security, in excess of USD 6.5bn, showing again the ample demand for regional fixed income securities.

The primary market in the region continue to see interest from banking sector issuers. According to reports, Abu Dhabi Islamic Bank is considering whether to raise funds through a USD denominated sukuk issue over the next couple of months. This follows a likely issuance of USD denominated Tier 1 perpetual non-call sukuk from Kuwait’s Warba Bank later this week.

FX

AUD has appreciated against the other major currencies this morning after the RBA kept interest rates unchanged at their record low of 1.50% (see above). As we go to print, the AUDUSD currently trades 0.35% higher at 0.7606. Having found support over night at the 61.8% one year Fibonacci retracement of 0.7571, we expect this to remain a level of support in the short term, with a sustained break of this level needed to realise further declines for the pair.

Equities

Developed market equities closed lower as investors exercised caution ahead of the Fed meeting later next week. The S&P 500 index dropped -0.3% while the Euro Stoxx 600 index declined -0.5%. Asian equities are trading marginally lower this morning tracking weak close to developed markets overnight. The Nikkei index was trading -0.2% at the time of this writing.

It was a relatively positive day for regional equities even as volumes continued to remain low. In fact, volume on the Tadawul was at its lowest since October 2016. In terms of stocks, Arabtec rallied +6.4% in a move which can be described as pull to par ahead of the rights offering later in the month. DXB Entertainments gained +1.1% to recover some of its recent losses.

Elsewhere, the EGX 30 index rallied +1.0% amid weakness in the EGP. Real estate sector stocks continued to gain traction with Palm Hills gaining +3.1% and Helipolis Housing +5.4%.

Commodities

Saudi Arabia's energy minister will be speaking at the CERA Week conference in the US today where he may provide some indication over whether the OPEC production agreement will be extended once its initial term ends. Russia's energy minister said it was 'premature' to discuss extending the deal. Russia has so far been able to benefit by not cutting output as much as Saudi Arabia has done in 2017.

The IEA published a new report yesterday in which it doubled its forecasts for non-OPEC oil supply growth in 2017-18 and it expects US production between 2017 and 2022 to rise by as much as 1.6m b/d, compared with a previous forecast of 1.3m b/d. The IEA also projects Russian output staying relatively steady instead of its previous forecasts gradually declining output. None of the report makes for particularly comfortable reading for any OPEC members as securing long-term market share is going to come back as an objective once the group decides that prices have steadied in a range and the risk of collapse has dissipated.

Oil prices were roughly flat yesterday, staying close to their comfortable levels. Both Brent and WTI are now just bumping along above their 100-day moving averages although we would note it’s the long term averages that have converged on prices rather than the other way around as volatility continues to ebb from this market.

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