October Monthly Insights 2016

Debt issuance has been a theme for the region all year and with Saudi Arabia announcing the terms of its new sovereign bond this looks set to remain in focus. This is timely as it is occurring just as investors and major central banks are thought to be considering the continued wisdom of unconventional monetary policies causing yields to push up.

• Global macro: The relative inaction by central banks over the last month reflects the limits of monetary policy, but also the sense that even if the benefits of low rates are becoming more marginal, the prospect of raising them is even more unpalatable.   

• GCC macro: Economic activity in the GCC was relatively robust in Q3, with evidence of expansion in both the oil and non-oil sectors.  However, additional fiscal tightening in Saudi Arabia and the likely impact on consumption and investment has led us to revise our 2016 and 2017 growth forecasts down to 1.4% and 1.8% respectively.    
• MENA macro: Outside the GCC, Q3 2016 saw little in the way of positive data released that could suggest the region’s economic recovery is close to starting.
• Sector Focus: The UAE is the second largest automotive market (including cars and commercial vehicles, parts and accessories, tractors) in the GCC after Saudi Arabia.
• Fixed Income: Last month marked the inflection point at which markets began accounting for the possibility of higher yields in the near future which in turn saw sovereign and corporate bond prices fall. However, emerging market bonds, including GCC bonds, continued to benefit from investors’ perennial hunt for yield.
• Currencies: There have been two significant developments for the FX markets in October. Firstly, sterling plummeted to a new 30 year low, demonstrating vulnerability to political uncertainty. Secondly, USD broke out of its 11 month downward trend to reach new 2016 highs.
• Equities: Last month, global equity markets paused as first signs appeared of a possible rethink from central banks about the longevity of the current direction of monetary policies. There were also concerns over lack of earnings growth and debate over the need for fiscal stimulus.
• Commodities: Oil prices have received a bump upward thanks to OPEC's surprise announcement to cut output but the forward curve has remained stubbornly in contango. Lower industry costs and the potentital for shale to return is keeping doward pressure on longer dated oil prices.