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Edward Bell - Senior Director, Market Economics
Published Date: 22 June 2020
The Bank of England kept policy rates unchanged at 0.1% at its June MPC meeting and increased the level of quantitative easing by GBP 100bn. Total QE from the bank will now be GBP 745bn but the BoE will slow its pace of asset purchases to GBP 4bn/week from closer to GBP 13.5bn at the moment. British markets appeared largely resigned to the extension of QE and sterling and UK gilt yields both fell in response to the announcement. Initial PMI data for June will be released later this week that is expected to show a continued improvement in the British economy but the survey was probably too late to account for the reopening of shops in the country, hence the data may be softer than activity suggests. Retail sales in May far outperformed consensus expectations, gaining 12% m/m thanks to healthy online shopping.
Saudi Arabia has lifted its curfew to allow commercial activity to resume although it will still enforce rules around social distancing. No international flights will be allowed and pilgrimage remains prohibited. The easing of restrictions comes despite a recent acceleration in the number of Covid-19 cases in the country. Saudi Arabia has also increased customs duties on imports although the number of liable goods was fewer than had earlier been proposed.
In the UAE, data from STR Global showed hotel occupancy in Dubai recovered slightly from April’s low to 27.7% in May, although it remains well below year-ago levels. RevPAR was only fractionally higher than April at just over USD 18 in May. Hotel room supply was also down around -16% y/y in May as some hotels closed during the lockdown to reduce operating expenses. Year-to-May, hotel occupancy in Dubai averaged 52%, while RevPAR was down more than 40% y/y. Abu Dhabi hotels fared better in terms of hotel occupancy as authorities used hotels for quarantine, although RevPAR was also down sharply y/y.
Markets this week will fixate on PMI data from the Eurozone and UK while the IMF will release updated projections for the global economy in its latest World Economic Outlook. Regional economies will likely see growth projections downgraded as many participate in the OPEC+ production cuts, where deep cuts will run for longer than initially planned back in April, while travel restrictions and austerity measures hamper growth in non-oil sectors across the GCC and wider Middle East region. As of April the IMF assumed 2020 real GDP would shrink by -3.5% in the UAE (our forecast is -5.5%) and -2.3% in Saudi Arabia (-4% in our expectations).
Source: Bloomberg, Emirates NBD Research
The divergence between risk assets and treasuries resumed last week as first signs of hesitancy in equity markets emerged. USTs ended the week marginally higher amid commentary from the Federal Reserve officials suggested that they remain wary over economic growth and that more policy support could be on way if economic activity does not pick up. Yields on the 2y UST and 10y UST ended the week at 0.18% (-1 bp w-o-w) and 0.69% (-1 bp w-o-w) respectively.
Regional bonds continued their unprecedented rally. The YTW on Bloomberg Barclays GCC Credit and High Yield index dropped 14 bps w-o-w to 3.07% and credit spreads tightened 14 bps to 243 bps.
Moody’s lowered the outlook to negative from stable on ratings of eight UAE-based banks but affirmed their ratings. The rating agency cited potential material weakening in their standalone credit profiles amid the coronavirus outbreak, low oil prices and pre-existing economic challenges. The banks included ADCB, ADIB, Emirates NBD and Rak Bank among others.
Despite initially looking like it was going to extend its losses, the dollar experienced an uptrend for almost all of last week. The DXY index, a measure of the dollar against a basket of major currencies, recorded steady gains to close on Friday at 97.663, marking an increase of 0.35% from the week prior's closing price. USDJPY declined to 106.88 as risk aversion came to the fore in Asian markets amid fears of a second wave of the coronavirus.
The euro declined to 1.1178 last week after momentarily breaching the 1.1350 level following the dollar's weakness. German Chancellor Angela Merkel has issued a warning to European Union leaders that if they were unable to agree on a stimulus package the consequences could be dire. Sterling declined by over 1.50% to 1.2350 following news that UK government debt rose above 100% of GDP in May for the first time since 1963. Additionally the Bank of England have announced that they will add another GBP 100bn to its quantitative easing program. The AUD and NZD traded mostly sideways for the majority of the week, both recorded modest declines to reach 0.6836 and 0.6407 respectively.
Regional equities started the new week on a negative note. The DFM index and the ADX index lost -0.9% and -0.2% on the back of weakness in banking sector stocks following the decision of Moody’s to revise the outlook on eight UAE banks credit rating to negative. Dubai Islamic Bank and Abu Dhabi Commercial Bank dropped -2.5% and -0.6% respectively.
Oil prices managed to recover last week with both WTI and Brent futures reversing the prior week’s losses. WTI closed at USD 39.75/b, up 9.6%, while Brent closed 8.9% higher at USD 42.19/b. A resurgence of Covid-19 cases in Beijing and consequent shutting down of some activity shook market confidence during several trading sessions that demand would face a difficult outlook for the rest of the year but a still buoyant risk rally helped to pull commodities higher.
OPEC+ held its joint market monitoring committee at the end of last week and agreed specific targets for countries that failed to hit their production cut targets during the initial months of the OPEC+ agreement. Iraq and Kazakhstan outlined how much they would cut to make up for their earlier misses while Nigeria and Angola will make their proposals this week. The JMMC did not recommend any short-term adjustments to the OPEC+ deal and will next hold its monthly meeting in mid-July. From August OPEC+ is to taper its production cuts and the producers’ bloc will be cautious to avoid its own ‘taper tantrum’ if demand is still at risk of Covid-19-related shutdowns.
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