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Edward Bell - Senior Director, Market Economics
Daniel Richards - MENA Economist
Jamal Mattar - Research Analyst
Published Date: 03 September 2020
There was more positive news from US manufacturing yesterday, as factory orders rose 6.4% m/m in July. This was up from 6.2% the previous month, and exceeded expectations of a 6.1% gain. This followed on from fairly robust ISM and PMI surveys earlier in the week, confirming that American factories are seeing strong new orders – even if the employment subcomponents of those surveys continued to lag.
This trend was confirmed by the ADP private payroll employment report for the US released yesterday, which showed that only 428,000 jobs were added in August – while this was up from the 212,000 seen in July, which was itself upwardly revised from the previous reading, it was far weaker than the consensus forecast of a new 1mn jobs being created. Leisure and hospitality drove the job gains with 129,000, reflecting those that were lost during lockdown coming back again. Manufacturing was a laggard, however, adding only 9,000 new jobs.
Bank of England officials answered questions in parliament yesterday, with Governor Andrew Bailey maintaining that the bank retained some fire power to use if necessary, and that negative interest rates remained an option, although they are not currently on the table. The bank rate is currently at 0.1%, and the Bank has stepped up asset purchases since the start of the pandemic crisis.
Source: Bloomberg, Emirates NBD Research
Treasuries were mixed overnight as markets absorbed a disappointing ADP employment report with job growth coming far below expectations. The front end of the curve sold off with yields edging slightly higher while longer dated USTs gained: yields on the 10yr UST fell by 2bps to 0.6477%. The Fed’s Beige Book of anecdotal economic assessments indicated that the recovery in the US economy was underway but was still falling short of pre-Covid 19 levels of activity.
Dubai raised USD 2bn in a dual tranche, conventional and Islamic issue yesterday. The 10yr sukuk priced at 210bps over USTs while the 30yr issue printed with a coupon of 4%.
Sabic is also raising funds with a dual tranche 10yr and 30yr issue, each raising USD 500m. Initial guidance has the 10yr at 190bps over mid-swaps and the 30yr at a 3.375% coupon.
The dollar had a positive session on Wednesday. The DXY index advanced by 0.5% to reach 92.85 at the close and is holding ground today. USDJPY also earned moderate gains to trade at 106.20, with a move towards the 50-day moving average of 106.45 in sight.
Subsequently the euro declined by -0.5% overnight to reach 1.1855 and is pushing lower this morning. Sterling also sold off and has tested 1.3329 in early trade today. The AUD fell sharply to 0.7320, still reeling from the latest Q2 GDP results, whilst the NZD was largely unchanged at 0.6760.
US equities continued their strong run yesterday, with the S&P 500 gaining 1.5% on the day, pushing it up to a 10.8% gain ytd. The technology-heavy NASDAQ has gained an even more impressive 34.4% since the start of the year, adding to it with a 1.0% gain yesterday. Meanwhile, the FTSE 100 rebounded from the three-month low it sank to the previous day, climbing 1.4% yesterday, driven by homebuilders following positive news about the market.
Oil prices dropped sharply overnight despite a reasonably supportive set of data from the EIA. Brent futures closed at USD 44.43/b, down 2.5% while WTI was off by 2.9% to settle at USD 41.51/b. The primary catalyst seems to be two days of dollar strength shaking confidence in how much further oil could rally.
EIA data showed a large drop in US output last week—in response to Hurricane Laura—to 9.7m b/d. However, as the storm has dissipated that is likely to recovery quickly. Product supplied was also sharply lower, again likely a result of the hurricane which pushed refinery utilization to 76.7%, its lowest since the peak of the demand drop in April-May. Total crude stocks fell by 9.4m bbl last week with the Gulf Coast seeing the largest drop as deliveries were affected.
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