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Timothy Fox - Head of Research & Chief Economist
Khatija Haque - Head of MENA Research
Aditya Pugalia - Director, Financial Markets Research
Mohammed Al Tajir - Manager, FX Analytics and Product Development
Published Date: 26 November 2018
The European Union and Britain formally agreed the controversial Brexit deal on Sunday. However, the major hurdle is a vote in the House of Commons in December, with the EU parliament expected to vote in Q1 2019. At this stage, the likelihood that the UK parliament rejects the deal is significant, and this is likely to weigh on GBP in the run-up. On Friday the USD managed to recoup some of the losses it experienced during the early part of last week, even though stock markets remain fragile and bond yields are still soft.
Geopolitics will dominate in other respects this week as well, with the G20 meeting at the end of it being the main focal point. We would not be surprised if a trade agreement of sorts is agreed in principle between the US and China, giving some heart to markets, but the detail may not be as positive as the headlines suggest and any euphoria may well be short lived. Once again, sentiment may receive a short term boost, but whether it can be sustained will be the more meaningful question and test.
Attention on oil markets will also be prominent given the heavy losses experienced last week. President Trump may think he is succeeding in manipulating the price lower, but the real test will come with the OPEC meeting in early December, as OPEC interests are broader and not necessarily as aligned as the US President might think. Rather than delivering a consistently lower oil price, President Trump may actually be paving the way for greater volatility.
Markets may also be looking for silver linings in Fed statements over the course of the week, hoping for hints of a more dovish tone ahead of the December FOMC meeting. Both Fed Chair Jerome Powell and Vice Chair Richard Clarida are due to speak this week, but they are unlikely to give much away regarding the Fed’s intentions. Again the markets may see what they want to believe in the short term, but reality is only likely to come into view in December, a bit like with Brexit, with oil and over trade.
Source: Bloomberg, Emirates NBD Research
In a truncated week of trading Treasuries closed mixed even as risk assets remained under pressure. It is worth noting that the move in Treasuries were relatively subdued compared to that in US equities. Yields on the 2y UST, 5y UST and 10y UST closed at 2.81% (+1 bp w-o-w), 2.86% (-1bp w-o-w) and 3.03% (-3 bps w-o-w) respectively.
The political uncertainty in the UK over Brexit saw some investors take refuge in bonds. The yield on 10y Gilts dropped -3 bps w-o-w to 1.38%.
Regionally bonds continued to remain under pressure as oil prices slumped. The YTW on the Bloomberg Barclays GCC Credit and High Yield index rose +6 bps w-o-w to 4.78% and credit spreads widened +6 bps to 190 bps.
The 5y CDS spreads were wider across the region with 6 bps w-o-w increase in Saudi Arabia (99 bps), 3bps w-o-w in Abu Dhabi (71 bps) and 4 bps w-o-w in Qatar (78 bps).
EURUSD fell over the last week, cancelling the gains of the previous week. The 0.68% decline during this period has taken the price back to 1.1337, not far from the 200-week moving average of 1.1313. There has not been a weekly close below the 200-week moving average since November 2017. Should this level hold, further gains towards 1.15 can be expected in the final quarter of 2018. However, a weekly close below this level is likely to catalyze more significant declines towards the 2018 low of 1.1216. A break of this level could pave the way towards 1.10.
GBPUSD fell for a third week, losing 0.17% to close at 1.2813. This decline means that for a sixth week, there has been a close below the 100-week moving average (1.3135), which is bearish for the price. While the weekly closes are below this level, there is a risk of a retest of the one year low of 1.2662, a break of which could lead to a more significant falls towards the 1.25 handle.
Regional equities started the week on a negative note with all major indices closing in negative territory. Dubai Investments added +0.7% after the company said it has bought a 20% stake in Clemenceau Medical. Elsewhere, petrochemical stocks on the Tadawul closed lower after Brent oil closed below USD 60/bbl over the weekend.
Oil had its worst week since January 2016. The Brent and WTI oil prices dropped -11.9% 5d and -10.7% 5d respectively. The latest bout of weakness comes ahead of the OPEC meeting early next month where producers are widely expected to cut oil production. However, ahead of the meeting Saudi Arabia’s oil minister said that the country’s production rose further this month. Additionally, there are growing concerns over global economic growth and its resultant impact on oil demand.
Despite the sharp correction, sentiment remains weak. The data from Bloomberg show that the premium spread between put options and call options is at its widest level since 2013.
PKR devalued again
China cancels trade talks with the U.S.
The risk of a "no deal" Brexit
Metals tentatively look forward to 2019