EU meeting set to debate Brexit deal

The EU leaders’ summit beginning today could mark the end of the journey for Brexit if a deal between the EU and UK government can be achieved or it could end up being another step in a protracted deterioration in relations between the UK and the rest of the EU. Negotiations have carried on at a frenetic pace in the last few days and the “basic foundations” of a deal have apparently been reached, according to European Council president Donald Tusk. An agreement over the next two days would then need to be supported by parliament in the UK, failing which Boris Johnson, the UK’s prime minister, will need to request an extension for Article 50 and pushing the UK’s departure date out into 2020. The Conservative government will particularly need to get support from its Northern Irish allies, the DUP, to ensure smooth passage of the deal and allow the UK to leave the EU at the end of the month. Sterling continues to perform well on expectation that a deal is at hand but any negative headlines over the next 72 hours could risk seeing a sharp correction.

US and Chinese officials are reportedly working on the text of the phase 1 trade deal reached at the end of last week, according to US Treasury Secretary Steve Mnuchin. The Chinese and US presidents are set to meet again in November at an APEC summit which could provide an opportunity for a finalized trade deal to be announced. Part of the phase 1 deal will focus on the forced transfer of technology to Chinese companies, something Chinese authorities deny is a regulatory requirement.

Retail sales in the US fell in September, declining by 0.3% m/m, the first drop in seven months. Motor vehicles, building materials and online purchases were all contributors to the decline. Core consumer sales—stripping out high ticket items like cars—were flat m/m, suggesting some waning confidence among US consumers. Retail data out of the US had been one of the few signs of strength in the global economy and any protracted slowdown there will raise the risk of further cuts to US interest rates and cast more of a pall over global growth.

US retail sales slow in September

Source: Eikon, Emirates NBD Research

Fixed Income

Treasuries closed higher amid weak economic data from the US. The curve bull steepened with yields on the 2y UST, 5y UST and 10y UST closing at 1.58% (-3 bps), 1.56% (-3 bps) and 1.74% (-3 bps) respectively.

Regional bonds continued to trade range bound. The YTW on Bloomberg Barclays GCC Credit and High Yield index remained around 3.27% while credit spreads hovered around 159 bps.

The Emirate of Sharjah raised USD 750mn in a 10y sukuk which was priced at MS+155 bps.

FX

Sterling remains in focus at the market awaits the outcome of the EU leaders’ summit and whether a Brext deal can be agreed. GBP is currently holding its 1.28 level but is likely to be higly vulnerable to headlines over the next few days.

This morning AUD is the strongest performing major currency in the aftermath of stronger than expected employment data. Following a loss of 15,500 full time jobs in August, the addition of 26,200 jobs in September helped lower the unemployment rate from 5.3% to 5.2% during the same period. As we go to print, AUDUSD is trading 0.48% higher at 0.6784, as market expectations for a rate cut from the RBA in November have lowered to 25.3% compared with 45.1% before the release of the data.

Equities

Developed market equities closed lower as investors remained cautious ahead of key earnings and the EU council meeting. The S&P 500 index and the Euro Stoxx 600 index dropped -0.2% and -0.1% respectively.

Regional equities rebounded from early week losses. The Tadawul added +0.5% while the KWSE PM index rallied +0.8%. Air Arabia rallied +1.5% after the company announced that it is launching a new Abu-Dhabi based low-cost airline along with Etihad Airways.

Commodities

Oil prices managed to snap a few days of declines overnight, with both WTI and Brent futures gaining by around 1%. However, uncertainty over whether a US-China trade deal can be reached and negative inventory data from the private sector the US are weighing on prices this morning.

Data from the API showed a build in US crude stocks of more than 10m bbl last week. Official EIA data will be released from the government later tonight. Any confirmation of a build of that scale would help add even more downward pressure on crude oil prices while uncertainty over global growth caps the upside potential.

Indian oil consumption fell in September, by 0.3% y/y, thanks to a sharp drop in diesel consumption. At an aggregate level, demand was its lowest level since July 2017. As India’s economy goes through a soft patch—particularly with industrial production slowing—downside risks to oil consumption are growing more and more apparent.

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