Chart 2: Japan trade. Chart 1: Univ. of Mich. consumer sentiment. Chart 3: UK real GDP

Transcription

1 Weekly Economic and Markets Review NBK Economic Research Department I 27 May 218 International & MENA Political instability weighs on the euro; oil prices dip on prospect of output increase by OPEC and Russia Key market indicators Stock markets Index Change (%) Regional Abu Dhabi (ADI) 4, Bahrain (ASI) 1, Dubai (DFMGI) 2, Egypt (EGX 3) 16, GCC (S&P GCC 4) 1, (All Share Index) 4, n/a KSA (TASI) 8, Oman (MSM 3) 4, Qatar (QE Index) 9, International CSI 3 3, DAX 12, DJIA 24, Euro Stoxx 5 3, FTSE 1 7, Nikkei , S&P 5 2, Bond yields % Change (bps) Regional Abu Dhabi Dubai Qatar Saudi Arabia International UST 1 Year Bunds 1 Year Gilts 1 Year JGB 1 Year m interbank rates % Change (bps) Bhibor Kibor Qibor Eibor Saibor Libor Exchange rates Rate Change (%) KWD per USD KWD per EUR USD per EUR JPY per USD GBP per USD EGP per USD Commodities $/unit Change (%) Brent crude KEC WTI Gold ; as of Friday s close 25/5/218 Overview Politics remained in focus with markets buffeted towards the end of the week by the calling-off of the US-North Korea summit, the economic proposals of Italy s likely new populist government and by the calling of a no-confidence vote in the government in Spain. The news saw stocks reverse gains made early in the week, pushed up the spreads on Italian and Spanish government bond yields and weighed on the euro, which dropped to a sixmonth low of nearly $1.16 versus the dollar. The strengthening of the dollar came despite a relatively dovish set of minutes of the Federal Reserve s last policy meeting, which increased the chances of two rather than three further rate hikes this year. Brent crude prices saw their first drop since early April, declining nearly 3% w/w to end just above $76/bbl. The dip came on expectations that OPEC and key non-opec producers whose supply discipline has been central to the recent rally will announce an increase in production by up to 1 million b/d when they meet next month to offset the drop in output in Venezuela and in Iran once sanctions take effect. Prices are still 14% higher than at the start of the year and nearly 5% up on a year ago. The sharp dip in oil prices came too late in the week to affect markets across the Gulf region. But there were encouraging signs on the region s longer-term prospects from the latest World Competitiveness Report by Swiss business school IMD, which showed both the UAE (7) and Qatar (14) making it into the top 15 out of the 63 countries ranked in 218. Both countries advanced their scores from the previous year, and scored highly for economic performance. The UAE topped the international league in the areas of international trade and attitudes and values, and finished second in a host of other areas. International macroeconomics USA: The minutes of the Federal Reserve s May policy meeting where rates were left on hold noted policy-setters concern about the possible negative impact on business sentiment of recent trade tensions, and hinted at some tolerance for inflation climbing above the 2% target for a time. The minutes were interpreted as dovish, and although the next rate hike is still expected in June with almost certainty, the probability of three rather than two further rates hikes this year has fallen. T: (965) , F: (965) , econ@nbk.com, 218 NBK

2 Elsewhere, data point to continued upbeat conditions in industry. The flash PMI figure for May came in at a strong 55.7 from 54.8 in April, above expectations and including a rise to 56.6 for the services component. Underlying durable goods orders also rose a robust.9% m/m. Consumer-related data, however, were a touch disappointing. Home sales both new and existing came in softer than anticipated, perhaps affected by rising prices: the FHFA house price index for March showed prices rising a sturdy 6.7% y/y, despite a modest.1% rise on the month. And the final reading of the University of Michigan s consumer confidence survey showed sentiment slipping to 98 still historically strong but below the mid-month flash estimate. (Chart 1.) 12 Chart 1: Univ. of Mich. consumer sentiment (index) 12 Japan: Export and import growth both accelerated in April. Export growth climbed from 2.1% y/y in March to 7.8% y/y in April, mainly on the back of higher car and manufacturing equipment shipments. Import growth recovered from the.6% y/y contraction in March to expand 5.9% y/y. (Chart 2.) The rise in export growth should offer some support to the overall economy, after it contracted in 1Q Chart 2: Japan trade (% y/y) Trade balance ($ billion) Exports (% y/y) Imports (% y/y) Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr Eurozone: Soft May Eurozone indicators hint at a longer-lasting period of lower growth. The Eurozone composite PMI came in well below expectations at 54.1 impacted by slower new order growth and weaker export demand while German consumer sentiment eased for a second consecutive month. Despite the apparent softening of economic momentum recently, the pace of the current expansion remains healthy. Political factors were also at the fore across Europe. In Italy, Guiessepe Conte, a newcomer to the political scene, was appointed prime minister, while Moody s has placed the sovereign s credit rating on review. Also, prospects of an early election in Spain were brought forth following a campaign finance scandal associated with PM Rajoy s Popular Party. These developments may warrant more caution from the ECB. The bank is currently expected to end its QE program by end- 218, with rates hiked by mid-219. However, further softness in the data and increased political uncertainty may see the latter pushed back. Eurozone inflation and economic sentiment, both market-moving indicators, are due this week, and are seen at 1.6% y/y (higher) and 112 (unchanged), respectively. 7 6 UK: Second estimates of GDP growth in 1Q18 show that the economy expanded by only.1% q/q and by 1.2% y/y. (Chart 3.) The quarterly growth rate is the slowest since 212, with consumer spending (+.2% q/q) and business investment (-.2% q/q) especially weak. Services fared slightly better (+.3% q/q), but like other sectors in the economy, was pulled down by the poor weather of Jan-March. Amid Brexit-related uncertainty, the slowdown in the growth of consumer-facing industries is a particular source of concern for policymakers Chart 3: UK real GDP (% change).. 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 Source: Office for National Statistics (ONS) q/q y/y T: (965) , F: (965) , econ@nbk.com, 218 NBK ww.nbk.com

3 GCC & regional macroeconomics : Inflation picked up slightly to.7% y/y in April versus March s.6% figure, with food deflation declining to.4% y/y from 1.% a month earlier. (Chart 4.) Prices for furnished goods rose at a slightly faster pace of 2.4% y/y versus 2.% in March. Inflation in clothing and footwear along with other miscellaneous goods eased, at.4% y/y and 5.6%, respectively. Core inflation, which excludes food and beverages as well as housing, was steady at 2.6% y/y Chart 4: consumer price inflation (% y/y) -1 Food -2 Housing -3 Total Source: Central Statistical Bureau UAE: Following cabinet approval last week, foreigners will be able to own a 1% share of businesses in the UAE by end Currently, they are not permitted to own more than 49% of UAE firms outside of designated free zone areas. The move is part of a wider plan that includes residency visas of up to 1 years to highly skilled expats, including investors and specialists in the scientific, technical, medical and research fields. The new ownership and residency rules are expected to stimulate FDI inflows as well as the domestic real estate market. Bahrain: Credit default swap (CDS) rates one bellwether of sovereign risk spiked to near multi-year highs last week amid a global sell-off of emerging-market debt and growing concerns about Bahrain s fiscal deficit and mounting debt burden. As of the 23rd of May, the CDS on five-year government debt was at 383 bps, up 93 bps year-to-date. Yields on five-year government debt also jumped, to a record high of 7.36% around the same time. Egypt: Public finance figures for the first seven months of FY217/18 (starting July) suggest that the modest pace of fiscal adjustment remains broadly on track against a backdrop of robust economic growth and rising tax revenues. Growth in spending eased to a still-high 23% y/y in July-January from a peak of 32% in November. (Chart 5.) Revenue growth remains strong, but also eased to 3% y/y. At EGP218 billion (US$ billion), the deficit was up 11% on a year earlier, but is still likely to shrink to around 1% of GDP this year from 1.9% in FY216/17. The IMF just concluded its third review of the Extended Facility Program, indicating that Egypt is heading toward realizing a primary fiscal surplus and thus reducing public debt for the first time in a decade. A disbursement of $2 billion will be made at the conclusion of the review, bolstering further international reserves Chart 5: Egypt public finances (fiscal year-to-date, % y/y) -1-1 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Markets oil Oil prices were pulled down on Friday, settling at $76.4 for Brent and $67.9/bbl for WTI after Saudi oil minister Khaled Al- Falih commented that OPEC+ is "likely" to increase production in the second half of the year to keep prices from rising too high. (Chart 6.) Al-Falih s remarks, which followed a meeting on Friday with his Russian counterpart, Alexander Novak, appear to be the first move in a coordinated play to take the steam out of the oil rally for fear that higher prices would ultimately undermine longer-term oil demand Chart 6: Crude oil prices ($/bbl) Revenues Spending ICE Brent (Front month) May-14 May-15 May-16 May-17 May-18 NYMEX West Texas Intermediate (WTI, Front month) T: (965) , F: (965) , econ@nbk.com, 218 NBK

4 Al-Falih indicated that up to 1 mb/d of additional supply could be released in 2H18 (amid robust oil demand and to compensate for actual Venezuelan and potential Iranian lost barrels) after OPEC concludes its biannual ministerial meeting in June. The announcement triggered a market sell-off that saw Brent decline by almost 3% on Friday and 3% week-on-week, breaking a run of six consecutive gains. Prices were also under pressure earlier in the week after the EIA revealed a surprise increase in US crude inventories (+5.8 mb to 438 mb) as imports rebounded and refinery runs fell in the w/e 18 May; US crude production also increased (+2 kb/d w/w, +943 kb/d ytd) amid a further rise in the oil rig count. Markets equities Global equities finished the week mixed, but were down overall on renewed political uncertainty in Europe and faltering negotiations with North Korea. The MSCI AC index retreated.3% w/w. US markets, however, outperformed, with the S&P and DJI up.3% and.2% w/w, respectively, benefitting from softening trade rhetoric. Meanwhile, concerns over Italy s new government and the possibility of early elections in Spain dragged the Euro Stoxx 5 1.6% lower, while US-North Korea tensions and the possibility of US tariffs on auto imports pulled the MSCI EM index down.4%. (Chart 7.) 12 Chart 7: Total equity return indices (rebased, 25 May 217=1) Chart 8: GCC equity markets (rebased, 25 May 217=1) Markets fixed income Geopolitical jitters, political uncertainty, and softening growth pressured international benchmark yields lower. US 1-year yields and 1-year Bund yields were down 13 and 17 bps, respectively. (Chart 9.) In the GCC, most sovereign benchmark yields followed US yields lower, shedding up to 2 bps in the case of Saudi Arabia s Chart 9: Global bond yields (%) KSA Tadawul Abu Dhabi SM Dubai FM SE US 1year UK 1year Qatar Exchange GER 1year Japan 1year MSCI GCC MSCI WORLD MSCI EM Regional markets outperformed on solid gains by Abu Dhabi and FDI reform in both Dubai and Qatar. The MSCI GCC index was up.7% w/w. Abu Dhabi led the pack (+3.8%), followed by Qatar (+1.8%) and Dubai (1.4%). Foreign investors can now own 1% of a company in Dubai, in addition to obtaining long-term visas. In Qatar, the government passed a similar draft law but went a step further by allowing full ownership in all economic sectors. Saudi coasted, up.3% w/w, on lower Ramadan trading and anticipation of the MSCI upgrade. s all-share index was down % w/w. (Chart 8.) T: (965) , F: (965) , econ@nbk.com, 218 NBK ww.nbk.com

5 Head Office International Network NBK Capital Abdullah Al-Ahmed Street P.O. Box, Safat 131 City, Tel: Fax: Telex: NATBANK Bahrain Zain Branch Zain Tower, Building 41, Road 286 Seef Area 428, P. O. Box 529, Manama Kingdom of Bahrain Tel: Fax: Bahrain Head Office GB Corp Tower Block 346, Road 4626 Building 1411 P.O. Box 529, Manama Kingdom of Bahrain Tel: Fax: United Arab Emirates Dubai Branch Latifa Tower, Sheikh Zayed Road Next to Crown Plaza P.O.Box 9293, Dubai, U.A.E Tel: Fax: Abu Dhabi Branch Sheikh Rashed Bin Saeed Al Maktoom, (Old Airport Road) P.O.Box ,Abu Dhabi, U.A.E Tel: Fax: Saudi Arabia Jeddah Branch Al Khalidiah District, Al Mukmal Tower, Jeddah P.O Box: Jeddah Kingdom of Saudi Arabia Tel: Fax: Jordan Amman Branch Shareef Abdul Hamid Sharaf St P.O. Box , Shmeisani, Amman 11194, Jordan Tel: Fax: Lebanon (Lebanon) SAL BAC Building, Justinien Street, Sanayeh P.O. Box , Riad El-Solh Beirut 7 22, Lebanon Tel: Fax: Iraq Credit Bank of Iraq Street 9, Building 187 Sadoon Street, District 12 P.O. Box 342, Baghdad, Iraq Tel: / / Fax: Egypt - Egypt Plot 155, City Center, First Sector 5th Settlement, New Cairo Egypt Tel: Fax: United States of America New York Branch 299 Park Avenue New York, NY 1171 USA Tel: Fax: United Kingdom Head Office 13 George Street London W1U 3QJ UK Tel: Fax: Portman Square Branch 7 Portman Square London W1H 6NA, UK Tel: Fax: France Paris Branch 9 Avenue des Champs-Elysees 758 Paris France Tel: Fax: Singapore Singapore Branch 9 Raffles Place # 44-1 Republic Plaza Singapore Tel: Fax: China Shanghai Representative Office Suite 13, 1th Floor, Azia Center 1233 Lujiazui Ring Road Shanghai 212, China Tel: Fax: NBK Capital 38th Floor, Arraya II Building, Block 6 Shuhada a street, Sharq PO Box 4, Safat, 135 Tel: Fax: / 5 United Arab Emirates NBK Capital Limited - UAE Precinct Building 3, Office 44 Dubai International Financial Center Sheikh Zayed Road P.O. Box 5656, Dubai UAE Tel: Fax: Associates Turkey Turkish Bank Valikonagl CAD. 7 Nisantasi, P.O. Box Istanbul, Turkey Tel: Fax: Copyright Notice. The Economic Update is a publication of the. No part of this publication may be reproduced or duplicated without the prior consent of NBK. While every care has been taken in preparing this publication, accepts no liability whatsoever for any direct or consequential losses arising from its use. GCC Research Note is distributed on a complimentary and discretionary basis to NBK clients and associates. This report and other NBK research can be found in the Reports section of the s web site. Please visit our web site, for other bank publications. For further information please contact: NBK Economic Research, Tel: (965) , Fax: (965) , econ@nbk.com T: (965) , F: (965) , econ@nbk.com, 218 NBK