Weekly Economic Review – Week ending July 2, 2016

Current Week Previous Week Change Current Week Previous Week Change
DFM 3311.10 3367.64 -1.68% USD/INR 67.32 67.97 -0.96%
ADSM 4497.64 4499.73 -0.05% EUR/USD 1.1136 1.1117 0.17%
SENSEX 27144.91 26397.71 2.83% USD/JPY 102.52 102.22 0.29%
NIFTY 8328.35 8088.60 2.96% USD/CNY 6.6597 6.6218 0.57%
DOW 17949.37 17400.75 3.15% Gold 1341.35 1315.75 1.95%
NASDAQ 4862.57 4707.98 3.28% US 10 yr 1.44 1.56 -7.69%
S&P 500 2102.95 2037.41 3.22% Brent 50.35 48.41 4.01%

Consolidation in the banking sector in UAE hit the headlines with two of top three banks in Abu Dhabi: NBAD & First Gulf Banking (FGB) announcing a decision to merge. This will create the largest bank in the Middle East.  NBAD is owned by Abu Dhabi’s sovereign fund – Abu Dhabi Investment Council & FGB is owned by the ruling family of Abu Dhabi.  This announcement could pave the wave for some other mergers in the overbanked UAE banking sector where about 50 banks operate in an economy with GDP of over $400 billion in size and population of about 10 million.  Stock markets cheered this move with stocks of both banks shooting higher. The cost savings could be substantial as both banks are headquartered in Abu Dhabi and there could be a significant reduction in high cost head office staff.  FGB which is rated two notches lower than NBAD by Moody’s would benefit substantially from lower cost of funding in the merged entity.  In terms of business segments there would be large overlaps, though NBAD is stronger on the wholesale lending side & FGB is stronger on the retail and business banking segment. The merger could take about a year or more to be effective but could happen earlier given the strong ownership structure.

The sovereign fund segment in Abu Dhabi also witnessed consolidation with Mubadala Development Company(Mubadala) & International Petroleum Investment Company (IPIC) to be merged.  Mubadala was formed to increase investment in the Emirate of Abu Dhabi whereas IPIC was the arm used to make investments in the energy & petrochemical sector globally. As per the Emirate’s state news agency which reported this merger a committee headed by Deputy Prime Minister Sheikh Mansour will oversee the merger.

As per data from the UAE Central Bank, the loan to deposit ratio for the system as a whole increased to 101.75 in May 2016. Loan growth surged higher by Dhs. 15.5 billion whereas deposit growth was sluggish increasing by Dhs. 6.30 billion.  The gap between loan growth and deposit growth is increasing in 2016, with loan growth at Dhs. 46.30 billion outstripping deposit growth at Dhs. 6.30 billion.

The largest employer in India the central government which employs about 4.7 million and has about 5.3 million pensioners will have a big pay hike as the Union Government cleared a proposal to hike salaries which will range from 14-23%. The incremental payout by the government is expected to about $12 billon which should help spur spending in the urban centers where most of the federal government employees are based. This combined with a good monsoon season will spur both rural and urban consumption and could trigger the much required boost to consumption, which can drive demand.

India’s Nikkei Markit manufacturing PMI inched higher to 51.7 and is now over 50 for six consecutive months.  As per the report increased business inflows helped manufacturers to increase production.  It highlighted strong domestic demand as the main driver of growth, but lackluster global demand is holding back manufacturing.

India’s foreign debt increased by $10.6 billion in the 12 months ending March 2016 to $485.6 billion. While the overall level of foreign debt is about 25% of India’s GDP, the amount of short term debt is only 17% of overall debt.  The actual quantum of foreign currency debt is actually lower with the Rupee component comprising of FII money in G-secs, corporate bonds, NRE & NRO deposits accounting for about 28.7% of overall debt.

The Indian Rupee posted sharp gains against the US Dollar as risk aversion eased in markets. Equities also made a roaring comeback  and recouped much more than the Brexit losses as risk aversion evaporated quickly. June was the fourth consecutive month where Foreign Institutional Investors (FII’s) made net purchases of Indian equities. With reforms gathering pace and the GST Bill expected to pass through parliament in the Monsoon session the economy is poised for a takeoff and this is reflecting in the stock markets optimism.

UK lost its only AAA credit as rating agency Standard & Poor’s cutting UK’s rating by two notches to AA.  The reason cited by S&P is that the referendum could lead to a deterioration of UK’s economic performance, including its large financial services sector.  S&P also mentioned that the leave result would weaken the predictability, stability and effectiveness of policymaking in the UK. S&P also left the outlook at negative stating that it reflects the risk to economic prospects, fiscal & external performance and the role of sterling as a reserve currency as well as risks to the constitutional and economic integrity of the UK if there is another referendum on Scottish independence. Rating agency Fitch cut UK’s rating to AA from AA+ and also had a negative outlook.  The rating cut by Standard & Poor’s did not have much impact as the 10-Year UK Government Bond yield traded below 1% for the first time ever and is now down about 50 bps over the last one month.  This move lower was inspired by comments from Bank of England Governor that a cut in interest rates could be needed to cushion the blow to the economy from the Brexit vote. UK stocks were quick to recoup Brexit losses and came back roaring gaining 6.91% for the week and is actually at the highest level for the year!!  The story in the Eurozone with equities is quite different with Germany’s DAX down about 6% from a month back and Spanish & Italian equities down double digits.

The drama around Brexit will not be really over until UK triggers Article 50 and formally requests the EU for exit talks. EU officials have made it clear that they are not interested in talks unless Article 50 is triggered.  PM David Cameroon, when he stepped down mentioned that the new leader will start the process of triggering Article 50. Indications from some of the UK leaders is that they are not willing to trigger Article 50 in the current year.

The EU also had its rating cut to “AA” though the outlook was moved higher to stable. The reason cited was the greater uncertainty following the Brexit vote.  S&P stated that Brexit lessens the supranational’s fiscal flexibility, while weakening political cohesion. Eurozone unemployment meanwhile fell to seven-year low of 10.1% & broader EU unemployment fell to 8.6% which is the lowest since March 2009. This should be a reason for EU members to celebrate, but it is actually one of the reasons for disenchantment with the EU. The divergence in country-wise numbers is great with the highest unemployment rate in Greece at 24.1% and the lowest at 4% in the Czech Republic. Germany has the third best unemployment rate at 4.2% which is at a record low since Germany unification. On the other side countries where unemployment is higher than the Eurozone are Italy, Portugal, Cyprus, Croatia, Spain & Greece.

The Chinese Yuan has crept lower over the last two weeks as world attention was focused on “Brexit.”  The offshore CNH that is traded in Hong Kong is a better indicator of sentiment of USD/CNY which is controlled much more than the CNH. It has crept higher from 6.55 in early June to 6.67, down 1.83% which is a large move and the lowest level since Jan 2011.

The first leading indicator of consumer sales in US for June, was negative as Vehicle Sales in June dipped lower to 16.7 million, well below the record 17.5 million units in May. Vehicle sales which constitute about 25% of retail sales, has been the key driver of consumer spending in 2015 and the first dip in 2016 will raise concerns.  As per data from Bureau of Economic Analysis, personal income as well as personal spending slowed down in May.

Personal Income was lower at 0.2% in May and consumer spending was also lower at 0.4%.  The weakness in this report was savings which dipped lower by 1 bps as consumers dipped into savings. The saving rate fell lower to 5.3% which is the lowest for the year.  GDP growth for Quarter 1 was revised higher to 1.1% in its third and final reading. Second quarter GDP expectations are currently around 2% and Q3 GDP expectations could be hurt by the ongoing turmoil in markets due to Brexit.

Inspite of the rally in equities the “risk averse” posted gains with Gold, Silver & US Treasuries all gaining as expectations of Quantitative easing increased across the globle. Two-year US Treasuries trading just above 0.50% indicate very low probability of another rate hike.  Prices of 10-Year US Treasuries rallied higher with yields plummeting lower as markets started pricing in further rounds of monetary easing across the world. The entire yield curve of Swiss government bonds are now trading at negative yields. Silver has outperformed gold over the last week & is up 41.5% in 2016 and is one if the best performing assets.  With the rally in gold, silver has lagged and has a caught up fantastically this week rallying over 10.15%.

Disclaimer: This is not a research report of Quantum Auditing. These reviews should not be taken to constitute advice or recommendation. Quantum Auditing does not claim it to be accurate nor accept any responsibility for the same.

Source of information: Bloomberg.com, Investing.com