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Timothy Fox - Head of Research & Chief Economist
Published Date: 06 August 2018
Trade issues continue to dominate initially after China said it would hit back at the U.S. and impose tariffs on USD60bn of U.S. imports at the end of last week, following the US threat to USD200bn of Chinese goods earlier. However, the CNY has recovered sharply this morning after hitting 2016 lows of 6.90 on Friday, with the PBOC acting to curb the Yuan’s softness by making it more expensive to short it. This may go some way to assuaging some of the US concerns about China devaluing its currency, although a resolution of the outstanding trade differences themselves still appears a long way off.
U.S. employment data was mixed last week with Friday’s non-farm payroll report showing that 157,000 new jobs were created in July, missing out on estimates for 190,000. However, despite the softer than expected headline figure, there were significant upward revisions to the previous two months. In addition, the unemployment rate fell from 4.0% to 3.9% and average hourly earnings were firm at 2.7% y/y. Such data is constructive for the Fed to continue raising interest rates in September, and the dollar was able to hold onto the week’s earlier gains as a result. U.S. CPI will be the main economic release in the coming week, with both the headline and the core rate expected to remain above the Fed’s 2.0% target.
In the UK, continued uncertainties regarding Brexit have continued to weigh on optimism and the pound even after the Bank of England raised interest rates at the end of last week. In addition to Bank of England Governor Mark Carney’s comments that ‘the possibility of a no deal is uncomfortable high at this point’, UK Trade Minister Liam Fox has stated that there is a “60 percent chance” of no deal being reached. Any downside surprises in the UK’s Q2 2018 GDP report this week could sour sentiment even further.
Over the remainder of this week, other central banks will come into focus. Investors will carefully scrutinize the summary of the Bank of Japan opinions following their tweaking of policy to allow 10-year yields more freedom of movement. Elsewhere both the RBA and RBNZ are set to meet and while both are expected to keep interest rates their current record lows of 1.50% and 1.75% respectively.
Source: Bloomberg, Emirates NBD Research
Escalating trade war fears kept risk appetite at bay last week. Despite solid economic data, yields on US treasuries fell across the curve with 2yr, 5yr and 10yr UST yields closing the week at 2.64% (-2bps w/w/), 2.81% (-4bps w/w) and 2.95% (-2bps w/w) respectively. Across the Atlantic, yield on 10yr Gilts also were subdued at 1.33% (-1bp w/w) despite Bank of England raising rates by 25bps to 0.75% last week.
Credit spreads had a week of range bound trading as corporate earnings continued to surprise on the upside. CDS level on US IG index was unchanged at 59bps while that on Euro Main closed the week wider only by a bp to 64bps.
Credit protection costs in the GCC region were also mostly range bound with marginal tightening of CDS levels on Abu Dhabi at 63bps, Dubai at 125bps, Qatar at 81bps and Saudi Arabia at 81bps respectively. However, Bahrain CDS widened by 5bps to 356bps on the back of its rating getting downgraded by one notch to B2 by Moody’s. In the cash bond space, yield on Barclays GCC bond index rose 2bps to 4.45% as credit spreads increased 5bps to 168 bps during the week, driven mainly by the rising yield on the Bahraini curve.
GBPUSD fell an additional 0.77% last week, closing at 1.3001. Of note is that the price was unable to sustain a break of the resistance at 1.3150 (not far from the 23.6% one-year Fibonacci retracement) earlier in the week and closed below the 100-week moving average (1.3076) for the first time since November 2017. This is technically bearish for GBPUSD and in the short-term, further declines towards the one-year low of 1.2774 cannot be ruled out. As we go to print GBPUSD is trading at 1.2996.
Strong economic growth in the U.S. and positive earnings announcements kept the bid for developed market equities intact. S&P 500 closed up by 0.46% last week while FTSE added 1.10% to its gains.
Following on from the positive sentiment in the west, Asian equities are trading firmer this morning. Nikkei is up 0.22% and Hang Seng is trailing higher by 0.54% so far.
Regional equities had mixed performance yesterday with no directional bias. DFM gained 0.13%, boosted by gain in Emaar shares while Abu Dhabi exchange closed lower by 0.11%. Elsewhere Tadawul and Qatar exchanges were down by 0.13% and 0.85% respectively while Muscat and Bahrain closed in the green.
Oil prices slipped last week as the trade dispute between China and the US flared up again. Brent futures closed the week down 1.45% at USD 73.21/b while WTI gave up about 0.3% to close at USD 68.49/b. The Brent forward curve ended the week in contango for the first few months of the curve while the USD 1/b backwardation in the 1-2 month WTI spread held steady.
Investors pared back net length in WTI by around 5.3k contracts last week while net length in Brent expanded by 4.7k contracts as investors closed out short 9.9k positions. The US drilling rig count slipped last week by two rigs but is up more than 90 rigs on the same time last year.
February Monthly Insights
USD declines on renewed risk appetite
Expectations for higher U.S. rates ease
OPEC production: exposed