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Weekly Economic Review - UAE, India & Global Macro

|Includes: VanEck Vectors - Indian Rupee/USD ETN (INR)

Weekly Economic Review

Week ending April 4, 2015


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Dubai equities posted strong gains amid value buying & some positives new, after posting losses for 6 weeks. Dubai Parks and Resorts traded its highest level at 0.9730 since listing in December after it announced a partnership with Hollywood Studio Lionsgate Entertainment to build attractions based on its franchises including the Hunger Games movie series. Dubai Parks and Resorts is still quoting below its IPO price and is not expected to commence operations till 2017 and not expected to post profits till 2018. In Abu Dhabi, bank stocks rebounded but the gains were subdued due to a sharp fall in state owned oil & power company TAQA, which posted increased losses in 2014 of $820 million.

The impact of the fall in Oil prices is being felt in the GCC countries; one sign of this is the Saudi drawdown on foreign currency reserves. As per data from the Saudi Monetary Authority (NASDAQ:SAMA) net foreign assets fell 1.4% from a year earlier to 2.650 trillion riyals ($707 billion) in February. This is the first time that net foreign assets have dropped since Feb 2010. The government has projected a deficit of about $40 billion for 2015, which means that the government will not cut spending and this will be financed by paring down the deposits that SAMA has overseas resulting in drop in such deposits by about $21 billion in February.

The long awaited and discussed Companies Law was issued this week by Sheikh Khalifa, President of UAE & Ruler of Abu Dhabi. The key change in this law is the lowering of the minimum float to 30% from 55% earlier. Existing companies will also be able to sell existing shares and not necessarily new shares. This key change could encourage private business to tap the IPO market. Underwriting has been legislated & companies will now be able to use the book-building process to price shares. The cap on foreign ownership has been maintained at 49%. UAE's economy minister, Sultan Bin Saeed Al-Mansouri stated that UAE was at an advanced stage of drafting a foreign investment law that would allow 100% foreign ownership of businesses in some sectors.

Indian equity markets were open only for 3 trading days this week due to holidays on account of Mahavir Jayanti & Good Friday, but posted their first weekly gain after 3 consecutive weeks of losses. The market is pricing in another rate cut at the RBI monetary policy meeting on April 7 next week and the rally in bank stocks was in anticipation of this cut. The Indian Rupee also traded in a narrow range with not much of large flows moving through markets. Growth take-off seems to be evasive with the Eight Core Industries growing at a tepid pace of 1.4% in Feb and the numbers for the previous 3 month of 1.8%, 2.4% & 6.3% depict a story of falling momentum. Natural Gas, Steel & Refinery Products were the laggards growing at -8.1%, -4.4% & -1.0% respectively. The impetus to this number was provided by the Coal & Electricity with growth of 8.1% & 5.2% respectively. There is something to cheer on the fiscal deficit front as the government should be able to keep the fiscal deficit below the 4.1% target. The realization of Rs.10,800 ($1.7 billion) crores from the sale of telecom spectrum will be a major factor in managing the fiscal deficit. The government will need to find measures to fix the structural imbalance in the public finances to move away from depending on proceeds of disinvestment & such onetime realizations to meet fiscal targets.

European economic data was upbeat overall this week, but the "Damocles Sword" of the Greek Debt crisis had it underpinned. In Spain, the pace of deflation seems to be ebbing with CPI for March down 0.7 %( better than the 1% fall expected). For Eurozone as a whole CPI in March came in at minus 0.1% and this also shows an improving trend with a low of minus 0.6% in Feb. German unemployment hit another post-unification low at 6.4%, with the number of unemployed persons falling by 15k. The manufacturing sector in Eurozone seems to be gathering some pace with the Purchasing Managers Index (PMI) edging higher to 52.2. German PMI was strong at 52.8, but the bounce in Italy was quite welcome hitting 53.3 which is the highest level since May last year. Even France which has been the laggard this year in Eurozone posted better than expected PMI number at 48.8. German retail sales fell 0.5% in Feb, beating market expectations of a fall of 0.7%. French consumer spending was under par & Spanish retail sales were disappointing. Greece faces a crunch time next week as it has to repay Euro 450 million to the IMF next week. Greek Interior Minister Nikos Voutsis remarked that the country would have to choose whether they want to repay the IMF or pay salaries and pensions. His preference was to pay the salaries and pensions. The EU is quite firm that if Greece wants to get the reminder of the Euro 240 billion bailout package they need to agree to reforms and implement them. The negotiations did not produce any breakthrough before the Easter weekend and will continue next week.

US economic data was disappointing again with the only number that has been holding up over the last few months, job growth plummeting to its lowest level since December 2013. Personal spending & FOMC's favored inflation gauge Core PCE Price Index for February were soft. Personal spending increased 3.3% (Y-on-Y) well below the increase in 4.5% (Y-on-Y) increase in Personal Income, which explains the softness we have been seeing in retail sales & also means that the savings rate is accelerating higher. Core PCE Price Index for February was slightly higher at 1.4%, but well below the Fed 2% target. The US economy added 126k Jobs in March which was way below economists consensus estimates at 245k. This is the first time since January 2014 when the jobs added were below 200k. The weakness was exemplified by the downward revision of 69k to the January & February numbers. Wage inflation as measured by average hourly earnings was up 2.1%. The unemployment rate determined from a survey of households remained steady at 5.5%, whereas the broader unemployment measure U-6, which includes people marginally attached to the labor force improved marginally to 10.9% from 11.00 in February. The weakness in payroll data and no sign of wage inflation will make it difficult for the FOMC to push through a rate hike in June to September, unless this weakness is one off and we see a recovery in the coming months. Total Vehicle Sales in the March rebounded to annual pace of 17.2 million. Motor Vehicle sales is an important component of retail sales and a spike here in March, could bode well for the March retail sales. ISM's manufacturing Index for March dipped lower to 51.5 from February's 52.9 and is the lowest since May 2013. The strong dollar seems to be hurting the manufacturing sector as the Export component fell sharply lower to 47.5 from February's 48.5. The important component, backlog of orders also fell sharply by 2 percentage points to 49.5.

Fed speak continued this week with non-voting member Loretta Mester ,who is considered to be hawkish, mentioned that the slowdown in Q1 GDP should be transitory and this should not unduly delay the hike in Fed Funds rate. She went on to say that an initial hike would be appropriate sometime in June through September. Voting member, Jeffrey Lacker said the main interest rate should be raised in June amid a stronger job market, consumer-spending growth and inflation heading back toward the Fed's target. Esther George, who is a non-voting member this year also voiced her view "moment to raise rates was approaching." Voting member Dennis Lockhart stated that he is not worried about the recent slowdown in the US economy and this has not changed his view that a rate hike in June is required. US interest rate markets discounted a lot of this Fed Speak and the 10 year yields slipped lower after payroll data. In our report dated April 19,2014 it was mentioned "The US Dollar 5 year swap rate at 1.82% could be a good receive at this point with positive carry of 150 bps which could continue to be the same for the next 2 & 1/2 years." This idea has only 4 year left for maturity & the 4 year swap rate currently is at 1.38%, which means that this deal has earned about 150 bps in one year and it has a positive MTM of about $200k on a Notional of USD 10 million.

Iran & the six negotiating countries announced that they have reached a framework for limiting Iran's nuclear program. There are some details which need to be worked out but this a major breakthrough which could have large implications for the Oil market. Iran would be able to pump incremental about 1 million barrels a day in quick time. The Iranian oil minister had indicated that they would not let go of their market share under no circumstances in January. The other factor that will be attractive to exporters in US, China & EU is the large domestic market in Iran which has been starved of products due to the stranglehold of sanctions for nearly 10 years now. Crude Oil prices fell by about 2% on Thursday when the breakthrough was announced.

Compiled & Researched by: Shailesh N. Mulki

Disclaimer: The views and information contained herein are the personal views of the author. These should not be taken to constitute advice or recommendation.