OPEC Plus agrees production cut

• OPEC+ agreed to cut overall production by 850 th b/d over the next two months, surprising the market.  Saudi Arabia will cut oil production by 1mn b/d OPEC over February and March to allow non-OPEC producers Russia and Kazakhstan to boost production by 150 th b/d.  Other OPEC members will keep oil production unchanged and the group will meet again in March to discuss output levels for April.  Oil prices rose more than 5% on the news, as the market had been looking for at best, no change, or possibly an increase in production next month.  

• Saudi Arabia, the UAE, Bahrain and Egypt signed an accord with Qatar on Tuesday ending three-and-a-half years of sanctions and restoring full diplomatic ties. Saudi Arabia has already opened its airspace to Qatar and the other countries are expected to follow suit. 

• China’s Caixin services PMI slipped to a still high 56.3 in December from 57.8 in November.  The reading was lower than the median Bloomberg forecast. The composite PMI also declined to 55.8 from 57.5 in November, still firmly in expansion territory. 

• In the US, the ISM manufacturing index came in at a higher than forecast 60.7 in December, with new orders increasing sharply and employment increasing for only the second time in 2020.  This provides further evidence that the manufacturing sector has held up well even as this latest surge in coronavirus cases has led to further restrictions on activity. 

• The joint session of congress to certify the electoral college vote will be held today. The process will likely be drawn out as many Republican congressmen and senators have indicated they will object to the certification, but this is unlikely to affect the final outcome.  The runoff election for two senate seats in Georgia yesterday is too close to call, with a record turnout. More than 3mn people voted early and results may take a couple of days to collate.  

• In the UK, Chancellor of the Exchequer Rishi Sunak announced a new support package in the wake of the renewed lockdowns which will add more pressure on businesses, especially those in hospitality, retail and travel. The package is worth GBO 4.6bn and includes a one-off grant of GBP 9,000 to firms per property to around GBP 4bn, and another GBP 594mn available for discretionary further support to businesses in need.

US ISM manufacturing index recovering

Source: Bloomberg, Emirates NBD Research

Fixed Income

• Bond markets are pricing in the ‘reflation’ trade in anticipation of Democratic candidates winning Senate run-offs in the US state of Georgia. Early results aren’t giving a conclusive tone to which party will win control of the Senate and allow or frustrate president-elect Joe Biden’s long-term, large-scale spending plans. The curve bear steepened with 10yr UST yields up 4bps overnight and adding more this morning to trade at 0.985% while the 2yr is still holding close to 0.12%.

• Indonesia priced a USD 3bn issue in three tranches this week. A USD 1.25bn 10yr priced at 1.9%, a USD 1.25bn 30yr at 3.1% and a 50yr USD 500m priced at 3.4%, all well within initial pricing guidelines.

• Regionally, Emirates NBD has carried out investor calls ahead of new unsecured Reg S issue.

FX

• FX markets continued to pressure the dollar with a broad based sell off against nearly all peers. The Euro managed gains of more than 0.4%, getting up to nearly 1.23 against the greenback while JPY has slipped below 103 for the first time since March 2020. Sterling also recovered some poise, adding 0.41% overnight to push back above 1.36.

• There were strong gains in the commodity currencies thanks to a big jump in the oil price. Both AUD and NZD rallied more than 1% overnight and are tempering those gains in early trade today while the CAD was stronger by 0.85% against the dollar.

Equities

• Following a shaky start to the year, US equities closed higher yesterday. The Dow Jones (0.6%), S&P 500 (0.7%) and the NASDAQ (1.0%) all ended the day up.

• In the UK, the FTSE 100 gained 0.6% on the back of the Chancellor’s new support package worth GBP 4.6bn, although business leaders were calling for him to go further.

• Elsewhere in Europe stocks edged lower, with the CAC losing -0.4% and the DAX -0.6%.

• Within the region, the DFM gained 1.2% and the Tadawul 0.2%.

Commodities

• Oil prices popped on news that Saudi Arabia would deliver a unilateral production cut of 1m b/d for February and March, allowing modest increases from Russia and Kazakhstan. Flat prices added nearly 5% on the close with Brent futures up to USD 53.60/b while WTI settled at USD 49.93/b and has pushed above USD 50/b in early trade today.

• The unilateral cuts by Saudi Arabia was listed as a “gesture of goodwill” by Saudi Arabia’s energy minister, Prince Abdulaziz bin Salman, and may also have directly been attempting to target short positions, telling speculators “good luck with their ouching.”

• While the market will welcome the higher prices so will every other producer, including those in the US shale patch. Saudi Arabia had adopted a policy of not being willing to underwrite poor compliance by other producers so how long they will maintain these voluntary cuts will be a serious test of patience.

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