UAE to introduce federal corporate tax

• The UAE has announced a 9% federal corporate tax that will apply to business profits over AED 375k (USD 102k) for financial years starting after 1 June 2023. The new tax won’t apply to businesses operating solely in UAE freezones, or those involved in the extraction of natural resources. The corporate tax is another step in the UAE’s fiscal reforms and efforts to diversify budget revenue away from the sale of oil and gas. The new corporate tax rate remains low by global standards.
• Dubai recorded real GDP growth of 6.3% y/y over the first three quarters of 2022 according to the Dubai Media Office. Growth was 17.8% in Q2, and 6.3% in Q3, as the economy rebounded from the deleterious effects of the pandemic on growth in 2020. Growth was broad based across all sectors, with the wholesale & retail trade sector making a particular contribution as it expanded 7.6% y/y over the nine-month period, adding 1.9pp to overall growth. Property and accommodation & food services were also notable drivers of the expansion.
• The Eurozone’s GDP expanded 0.3% q/q in Q4 2021, slowing sharply from 2.3% q/q growth in Q3 2021.  Growth in Q4 2021 came in at a robust 4.6% y/y. The data by Eurostat estimated that euro zone GDP in the whole of 2021 compared to the whole of 2020, based on seasonally and calendar adjusted quarterly data, increased by 5.2%. Germany, the euro zone's biggest economy, was the weakest performer, contracting 0.7% q/q and growing just 1.4% y/y. France, the bloc's second biggest economy, saw growth of 0.7% q/q and a 5.4% y/y expansion, while third-biggest Italy grew 0.6% q/q and 6.4% y/y. A surge in infections caused by the Omicron variant of the coronavirus caused COVID-19 measures to be reimposed in many European countries at the end of last year, taking away from growth dynamics.
• San Francisco Federal Reserve Bank President Mary Daly said on Monday that the US Federal Reserve should start raising interest rates from near zero in March, but should keep its options open on how far to raise them after that. Clarifying earlier comments, Daly said she does not know whether rates will need to be increased three times this year, as most Fed policymakers in December thought would be appropriate.  If they do rise that much, she expects the Fed will have tightened a lot and we will still have considerable accommodation in the system. She noted that price gains are broad-based and no longer confined largely to pandemic-hit sectors. Adding that while wages are rising there is no sign of that pushing up prices in a 1970s-style wage-price spiral. The challenge for the Fed,  according to Daly is to remove its "extraordinary accommodation" and allow the economy to stand on its own, without removing so much that it undercuts economic growth.

Today’s Economic Data and Events

• 4:30 Australia Retail Sales (MoM) (Dec) Forecast 3.90%  
• 7:30 RBA Interest Rate Decision (Feb) Forecas0.10%        
• 7:30 RBA Rate Statement                              
• 12:55 German Manufacturing PMI (Jan) Forecast 60.5     
• 12:55 German Unemployment Change (Jan) Forecast -8K              -
• 13:30 UK Manufacturing PMI (Jan) Forecast 56.9                56.9
• 17:30 Canada GDP (MoM) (Nov) Forecast 0.40%
• 19:00 US ISM Manufacturing PMI (Jan) Forecast 57.5       
• 19:00 US JOLTs Job Openings (Dec) Forecast 11.075M     

Fixed Income

• A relatively quiet day as far as newsflow helped to keep US Treasuries largely stable. Yields on the front end of the curve nudged higher with the 2yr yield up by less than 2bps to 1.1787% while 10yr yields were virtually unchanged. After the Fed’s hawkish tone last week markets will be looking for the ECB and Bank of England later this week if there will be any convergence in policy. Gilt and bund yields both ended the day up nearly 6bps overnight.
• Emerging market bonds were mixed overnight with Turkish bonds falling again sharply, with yields up 18bps to 22.38% as concerns increase over the tone of monetary policy. In South Africa, 10yr government bonds pulled slightly higher with yields down by 3bps to 9.978%. Indian bonds edged higher as well with yields falling to 6.6815%.

FX

• A recovery in risk appetite later in the day appears to have weighed against the dollar with the greenback losing ground against peers. The broad DXY index fell by 0.75% overnight, its largest single-day drop since May 2021. EURUSD rallied 0.75% to 1.1235 while USDJPY fell by 0.13% to 115.11.
• Among the risk-oriented currencies GBPUSD rallied by 0.34%, closing at 1.3447. Political noise will cloud the outlook ahead of the Bank of England meeting later this week but we still expect the bank can follow through with rate hikes. In commodity currencies USDCAD moved in favour of the loonie, falling by 0.49% to 1.2708 while AUDUSD added more than 1% to push back up above 0.70. NZDUSD was the relatively laggard but still managed gains of 0.4% to 0.6576. Commodity currency focus today will be on the RBA and whether they will start to normalize policy.

Equities

• US equity markets started the week on the front foot as risk appetite picked up later in the session, and all three major benchmark indices saw strong gains. The S&P 500 added 3.4%, lagged by the Dow Jones (1.2%) and the S&P 500 (1.9%). Nevertheless, all three ended January lower than they started, as US equities endured the worst month since the pandemic began in March 2020.
• European markets also had a poor January, the worst month since October 2020, although again this was mitigated slightly by a strong start to the week for most. The CAC added 0.5% and the DAX 1.0%, while the FTSE 100 closed flat.

Commodities

• Oil markets started the week on a strong footing with Brent futures up 1.3% at USD 91.21/b and WTI gaining 1.5% to USD 88.15/b. Market focus will be on the OPEC+ meeting on February 2nd where we expect the group at a minimum to agree to a 400k b/d increase for March production levels. However, there is an outside chance they could agree more to help insulate oil markets from the geopolitical risks fueling higher prices.
• Gold prices moved higher overnight as yields held stable. Spot gold added 0.3% to USD 1,797/troy oz while silver fell again. Industrial metals generally were softer with copper, aluminium and iron ore all falling overnight.

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