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US equity markets closed lower yesterday, Asian indices declined this morning and the USD is weaker against the major currencies after President Trump’s replacement of Rex Tillerson as Secretary of State with CIA director Mike Pompeo. While there has been speculation that Tillerson would be replaced for some time, his actual departure has raised market concerns about a further shift towards protectionism in the administration, particularly after the departure of economic advisor Gary Cohn last week. The new Secretary of State is perceived to be more aligned with Trump’s own views on trade tariffs, particularly against China.
The political developments in the US overnight have overshadowed strong economic data in Asia this morning. Chinese industrial production rose by more than expected in the first two months of this year, up 7.2% y/y against a forecast for 6.2% y/y growth. Retail sales in the year-to-February rose 9.7% y/y, only marginally missing the consensus forecast. In Japan, core machine orders surged 8.2% m/m and 2.9% y/y in January after contracting in December, and beating the forecast of -0.7% y/y.
US inflation data yesterday held no surprises, with headline inflation rising to 2.2% y/y from 2.1% previously and core inflation unchanged at 1.8% y/y. Today’s key US data release is retail sales, while in Europe we get German inflation, Eurozone industrial production and unemployment data.
In the UK, the Chancellor’s spring budget statement yesterday contained no big surprises. The forecast net public borrowing requirement was revised down by GBP5bn to GBP45bn for this fiscal year, and 2018 GDP growth was revised slightly higher to 1.5% in 2018, from 1.4% previously.
US treasuries closed higher following a subdued inflation data and fresh political turmoil in the White House. The curve flattened with yields on the 2y UST, 5y UST and 10y UST closing at 2.25% (-1 bps), 2.61% (-2 bps) and 2.84% (-2 bps).
Regional bonds remained unchanged amid continued fresh supply. Majid Al Futtaim raised USD 400mn from a perpetual bond which was priced to yield 6.375%. Dar Al Arkan is in the market and the IPT for 5y sukuk is around the 7.5% area.
USD weakened across the majors as the prospects of increased trade tariffs were given a boost by the replacement of Rex Tillerson as US secretary of state. As is usually the case in a risk aversion environment, the JPY has been the main beneficiary.
CAD is nearly three-quarters of a percent weaker this morning after dovish comments by BoC Governor Poloz during a speech overnight. The recent weakness in oil prices has also not helped the currency.
Developed market equities closed lower following fresh political turmoil in the US with the President Donald Trump making changes in his cabinet. The S&P 500 index and the Euro Stoxx 600 index dropped -0.6% and -1.0% respectively.
The Qatar Exchange (+1.6%) was a notable exception in what was a rather sluggish day of trading for regional equities. The focus remained on stocks which have announced an increase in foreign ownership limits or stocks which have the potential to do the same. Qatar National Bank rallied a further +6.9% and Industries Qatar another +4.6%.
Elsewhere, the EGX 30 index continues its positive run with a gain of +1.5%.
Oil prices pared early session losses but still closed lower. The WTI and Brent prices dropped -1.1% and -0.5% respectively. This following an industry data which showed a drop in US fuel inventory. Distillate inventories dropped by 4.26mn barrels and gasoline stockpiles by 1.26mn barrels.
Emirates NBD Research
