UK Chancellor of the Exchequer unveils winter plan

Chancellor of the Exchequer Rishi Sunak last week unveiled his winter plan for helping the economy weather the resurgent Covid-19 crisis in the UK, where new case numbers are surging once again and an increasingly large share of the population has come back under movement restrictions. The furlough scheme will be replaced by plans to cover up to two-thirds of workers’ hours in what he termed ‘viable jobs’. Other support measures, such as the 15% VAT cut for the hospitality sector, will be extended. These measures will weigh further on the budget balance. According to figures released on Friday, UK government borrowing in August was the third-highest since records began in 1993, and UK public debt has risen to the equivalent of 101% of GDP – the first time the debt load has been greater than the size of the economy since 1963.

Data out of the US at the close of last week indicated that the recovery is slowing from the post-lockdown resurgence seen earlier in the summer. Durable goods orders rose just 0.4% m/m, missing expectations of 1.5%, and markedly slower than the upwardly revised 11.7% seen in July. That said, the ailing aerospace sector weighed on the headline figure, and orders for non-defence capital goods excluding aircraft rose 1.8% m/m. In other data released last week, initial jobless claims came in at 870,000 in the week ended September 19, illustrating that despite the nascent recovery in the US, it has largely been jobless to date, and the labour market remains a parlous one. Meanwhile, tensions between the US and China continue to make headlines, as the US has imposed export sanctions on Chinese firm Semiconductor Manufacturing International Corp, meaning that US companies will need a license to sell it certain products.

The Turkish central bank hiked its one-week repo rate by 200 basis points at its MPC meeting on Thursday. This takes the benchmark interest rate to 10.25%. The TCMB further tightened liquidity by limiting access to this rate to just TRY 5bn at its auction on Friday, meaning lenders had to use the bank’s costlier rates of borrowing.

Durable goods new orders (m/m) slow in August

Source: Bloomberg, Emirates NBD Research

Fixed Income

Benchmark government bonds last week held to the ranges that they have spent most of September trading within. Yield on 10yr USTs closed at 0.6544%, a drop of around 4bps over the course of the week while moves in gilts and JGBs over the five days were even more muted. Markets will be watching the release of the September non-farm payrolls numbers in the US for the next directional push; consensus is for an increase of around 850k jobs and a dip in the unemployment rate to 8.2%.

Emerging market bonds fell last week and have declined for seven days in a row (USD EM bonds). As investors recalibrated positions and risk appetite ahead of month and quarter end emerging market bonds appear to be paying the price. Outside of USD-denominated assets, the Reserve Bank of India holds its policy meeting this week with consensus expectation for a hold at 4.00%. We have tempered our view for cuts from the RBI to one 25bps by year end as the bank will be keeping an eye on still elevated inflation levels. Bangko Sentral ng Pilipinas (the central bank of the Philippines) is also expected to keep rates on hold this week.

In the region, Egypt is preparing a green bond, according to the Finance Ministry. It would be Egypt’s first specific environmental oriented issuance and would finance as much as USD 1.9bn of green projects. Elsewhere, S&P affirmed their rating on Saudi Arabia at ‘A-‘ with a stable outlook.

FX

Last week the USD experienced its best winning streak since April. The DXY index rallied by 1.8%, climbing comfortably above the 94 handle for the first time since late July, and closed at 94.642. This marks a break beyond the 23.6% one-year Fibonacci retracement of 94.400. A newly proposed fiscal stimulus package is being debated amongst US officials, providing a boost for the greenback. USDJPY has rebounded sharply from six months early in the week, advancing by 0.97% to settle at 105.58. The 50-day moving average of 105.88 will be the next key indicator to look out for. 

Broad-based USD strength has weighed on major currencies paired against it. The EUR declined by -1.77% and closed at 1.1631, its lowest point since July. The currency has fallen well below the 76.4% one-year Fibonacci retracement of 1.1687 as rising Covid-19 cases in the region is spurring demand for safe-haven assets. GBP fell by -1.32% and closed at 1.2747 as the UK deals with both Brexit and Covid-19 concerns. Both the AUD and NZD suffered significant losses, declining by -3.5% and -3.15% to close at 0.7030 and 0.6592 respectively. This was the biggest weekly percentage decline for the AUD since March and the worst weekly showing for the NZD since May. 

Equities

Global equity markets came under significant selling pressure last week, largely on the back of the rapid rise in coronavirus cases seen in a number of major economies, not least France and the UK. France’s CAC index lost -5.0% over the week, while Germany’s DAX declined by a similar -4.9%. The UK’s FTSE lost- 2.7%, with its losses tempered by the fall in sterling, although the index did briefly touch a four-month low on Friday.

A similar trend played out in the US as data releases indicated that the recovery is slowing. The Dow Jones and the S&P 500 losing -1.8% and -0.6% respectively, although the NASDAQ managed to gain 1.1% w/w as fears over renewed restrictions on activity bolstered tech stocks. In Asia, the Hang Seng closed down -5.0% over the week, while the Shanghai Composite lost -3.6%.

Commodities

Oil prices lost ground last week thanks to persistent fear that oil demand will fail to recover strongly as countries need to reintroduce restrictions related to Covid-19. Brent futures fell 2.8% over the week to settle at USD 41.92/b while WTI closed at USD 40.25/b, a loss of just over 2%. Forward curves in both Brent and WTI remain soft with the 1-2 month spread in both contracts holding onto recent weak levels. Front of the curve spreads in WTI closed at USD 0.26/b while in Brent they are deeper at USD 0.49/b. The weaker conditions around the Brent market at the moment likely reflect uncertainty over whether Libyan production will return to markets in a significant way over the coming months.

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