Markets having second thoughts

There is some evidence that the developed world is indeed losing some steam

Timothy Fox, OpinionIndustry Expert
With over 20 years of international experience in the financial markets, Timothy Fox has been serving as Chief Economist of Emirates NBD in Dubai since November 2008.He is responsible for the development, coordination, and production of economic and financial analysis and reports, with a focus on global and regional economies and financial markets.Prior to joining Emirates NBD, he worked at a number of investment banks in London and New York, where his focus ranged from the foreign exchange markets to G10 and emerging market economies.He graduated from the London School of Economics and Political Science in 1985, and he is a frequent commentator on global and regional business events.

November 20, 2018

Markets appear to be having second thoughts about whether the Fed will carry through on its dot-plot implied forecast of 3x25bps rate hikes next year. Fed Vice Chairman Richard Clarida acknowledged last week that there is some evidence that the global economy is slowing, while Chairman Powell also expressed concern about global growth, as well as the US housing market (note the NAHB housing market index fell to 60 from 68 last night), the firm dollar and corporate borrowing.

Negative Q3 GDP growth readings from Japan (-.3% q/q) and Germany (-0.2% q/q) last week have also provided some evidence that the developed world is indeed losing some steam, although the divergence between the US and others in the G8 remains. We have an assumption of only 2 interest rate hikes next year, based on our expectation of softening growth in H2, and the market appears to be coming round to this view which is causing the USD to slip back as yields soften.

The much anticipated board meeting of the Reserve Bank of India concluded yesterday. On the surface it appears the meeting was cordial contrary to speculation. In terms of deliverables, some measures on providing liquidity have been announced as has been a proposal to reconsider the restructuring of non-performing loans emanating from small and medium enterprises. The serious issues of RBI’s surplus capital framework and consideration for public sector banks under corrective framework have been referred to committees. Overall, the decisions reflect a perfect harmony of prudence, autonomy and accountability. For the record, the next board meeting is scheduled for second week of December 2018. With the event throwing no negative surprises, the ‘RBI premium’ reflecting in the INR is likely to continue to fade. The INR ended yesterday at 71.65, the highest level since September.

Fixed Income
It appears that movement in equity markets are driving Treasuries. The curve bull steepened amid a sharp correction in equities. Yields on the 2y UST, 5y UST and 10y UST closed at 2.79% (-1 bp), 2.87% (-1 bp) and 3.06% (flat).

Regional bonds continued to drift lower amid continued weakness in oil prices. The YTW on the Bloomberg Barclays GCC Credit and High Yield index rose +1 bp to 4.73% and credit spread widened +2 bps to 186 bps.

Fitch assigned Senaat General Holding a first time rating of A with stable outlook. The company is rated three notches below the Government of Abu Dhabi, the sole shareholder of the company.

FX
The Dollar was weaker at the start the week, as equities fell and as the markets re-think the trajectory for US interest rates next year. EURUSD rallied to the mid-1.14s, USDJPY hit November lows while Cable steadied near 1.2860 as UK PM May avoided a no-confidence vote. Softer than expected US NAHB housing index added credence to the markets assumption of only 2 Fed rate hikes next, against the Fed’s 3 implied by the dot-plot.

The AUD has declined against the other major currencies this morning, following the release of the minutes from the RBA’s November meeting. Despite the central bank citing that the unemployment rate could fall further and that the next move in interest rates was more likely higher, they stated that there was “no strong case” for near term policy changes and that average real earnings had not increased in six years. In addition, they re-iterated that the direction of international trade policy was a risk to global growth. As we go to print, AUDUSD is 0.13% lower at 0.72582. Despite these declines, the break of the former daily downtrend remains true and we expect support at the 100-day moving average of 0.7255.

Equities
Developed market equities closed lower as technology sector stocks continued to take a beating. Concerns over Apple and Facebook dominated trading sentiment. The S&P 500 index and the Euro Stoxx 50 index dropped -1.7% and -0.6% respectively.

Most regional equities ended the day higher. The Tadawul and the DFM index added +0.8% and +0.2% respectively. The Tadawul was helped by gains in cement sector and banking sector stocks. National Commercial Bank added +2.0% while Najran Cement gained +5.7%. Elsewhere, Qatar Fuel continues to remain volatile. The stock lost -4.3%.

Commodities
Crude oil rallied to $57.37 highs after bottoming at $55.28 yesterday, before falling back a little. Reports that OPEC and Russia could reduce supply into year-end has been the main driver of the recovery. OPEC is set to meet in Vienna on December 6.

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Any opinions expressed here are the author’s own.

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