Regional Investors in ‘risk-off’ mode
As we approach the September FOMC meeting the probability of a September US rate hike appears to be slim, however, more importantly it is likely that a clear signal will be given regarding a potential rate hike in December. Despite subdued economic data the US dollar strengthened last week, retail sales shrank by 0.3% in August and industrial production fell by 0.4%, along with weak PMI data indicating softer economic momentum. The November FOMC meeting scheduled just before US elections could become a non-event. Along with the Fed, the BOJ will be the other major central bank in focus this week, with its policy review likely to result in some changes to current QE. The BOJ is likely to continue with its commitment of reaching its 2% inflation target.
During the week oil prices (Brent) declined by over 6% despite EIA data highlighting a consecutive two week decline in US oil inventories. US oil inventories fell by 15 mn barrels in the last two weeks to 510 mn barrels as compared to 525 mn barrels at the end of August. In its latest monthly report, International Energy Agency lowered global oil demand expectations for 2016 by 1.3m bpd and 2017 by 1.2m bpd. On the supply side, the report stated that OPEC’s near record production offsets declines from rest of the world. These dynamics could mean that the oil surplus will continue through 2017. The expectations from the informal meeting on the sidelines of the International Energy Forum in Algeria from 26-28 September 2016 are now low; any positive surprise could offset concerns around potential recovery in Libyan exports and Nigerian production. That said, an output freeze keeps production levels elevated and with the backdrop of tepid demand growth, a freeze may not be enough to balance the market. Earlier this week Iraq’s Prime Minister stated that his nation would support a production freeze in Algeria and separately, Iran said that it would attend the meeting.
Post the Eid vacations the regional markets have opened on quite a weak note despite valuations being quite attractive. Media reports suggest that the Saudi Arabian government has ended talks aimed at saving construction giant Saudi Oger, which is now facing the prospect of a multi-billion-dollar debt restructuring. According to Reuters, the Saudi government owes Saudi Oger about SAR 30 bn (USD 8 bn) for work it has completed and this huge backlog of payments has left Oger struggling to meet its obligations including SAR 15 bn riyals of loans payable to sub-contractors and SAR 2.5 bn to employees. Saudi Arabia took one more step towards de-subsidisation as it plans to remove subsidies on seven services and enforce a new visa regime with effect from 2nd October. The seven services are ports, passports, car driving license, car transfer, traffic violations, renewal of residence permits (iqama) for domestic workers and tariff (customs) protection for 193 commodities. Local press also stated that government is proposing to extend the Umrah season from the current eight months to ten months in line with Saudi Vision 2030 objectives which aims to raise the number of Umrah pilgrims from 8 million to 30 million.
In the UAE, Mubadala’s financial results showed a loss of AED 4.43bn ( $1.2bn) for H12016 vs profit of AED625m last year. The loss was mainly a result of impairments, even as revenue increased to AED 14.3bn from AED 13.6bn. The UAE has adopted a final version of Federal Bankruptcy Law.
Egypt's net foreign reserves rose USD 1.1 bn to USD16.66 bn by the end of August 2016. Foreign currencies increased by USD1bn (8.6% MoM), due to a 6-year deposit received from the UAE in August. The increase in reserves slightly improves the import coverage ratio which went up marginally from a low of 3 months in July to 3.3 months by the end of August.
With regards to our funds and portfolios we remain positive on the UAE market and continue to hold an overweight position. We continue to reduce our Qatar exposure, taking advantage of the strength created by the EM FTSE inclusion. We have also recently neutralised our Saudi exposure given the binary stance on an output freeze and attractive valuations. In the coming weeks, we expect the markets to be focused on statements by Fed members and the outcome of the informal meeting in Algeria.
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