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Weekly Economic Review - UAE, India & Global Macro

Week ending August 22, 2015


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Stock markets in UAE got hit hard on account of the sell-off in Crude Oil and the sell-off in global stock markets lead by China. The sell-off in stocks was particularly acute in Saudi Arabia with negative closes for the eight consecutive day on Thursday. The Saudi stock market Index Tadawul is now 40.38% lower than the 52 week high of 11,159.50 traded early last September in the frenzy of the run to the Saudi stock market opening up to foreign investors for the first time. In Dubai, the DFM Index is down 28.56% from the its high of 5,193.03 traded in early September last year.

Inflation in UAE increased to the 4.4% (Y-on-Y) in July, which is the highest level since Feb 2009 as per data from the UAE National Bureau of Statistics. The surge higher in inflation is due to increase in housing costs and utility prices.

The UAE Federal Law was amended resulting a new Articles of Association for Etisalat which will now enable foreign nationals to purchase up to 20% of the company's shares. These foreign nationals will be allowed to attend the AGM but will not be eligible to vote, which will be only reserved for UAE nationals. The new law stipulates that the implementation of this should be carried out within one year. Etisalat has a dividend yield of 5.97% and would be an attractive proposition for regional investors who prefer stocks with high dividends.

As per data from the UAE Central Bank, the deposits in the system decreased by Dhs. 2.2 billion and loan growth surged higher by Dhs. 14.40, pushing the overall Loans to Deposit ratio for the system as a whole over the 100% mark. With concerns overall regional growth which is the key driver for liquidity in the UAE Banking system, deposit growth could slow down further in the coming months putting upward pressure on Dirham deposit rates. Saudi Riyal one year forwards also fell further to around 300 pips and UAE Dirham forward rates also fell further to trade around 100 pips. Inter-bank Eibor rates nudged higher this week with the 3 month Eibor up over 4 bps this month to 0.80286%

The Indian Rupee which had managed to stay away from the crash in emerging markets upto late in July has succumbed to the pressure and continued its fall this week. It is now fallen by about 3% in the last one month. Indian equities also bore the brunt of the global sell-off in equities, falling about 2.5%. While the Indian equity market sells off, it could provide some good buying opportunity in the coming weeks, for the long term, as fundamentals in India could improve over the next year or two and some of the top end companies will outperform capitalizing on growth. Foreign Intuitional Investor (NYSE:FII) flows were negative for the second consecutive week. The Government is planning to offload 10% stake in IOC, India's largest oil company next week which is expected to fetch about $1.4 billion. The slump in oil prices will provide a bonanza for the trade deficit which has again been under pressure over the last few months. This will also help the fiscal situation where the subsidy bill will reduce.

The emergence of China in the major influencer in the global financial markets can be gauged from the fact that the current sell-off in global markets has emerged from China and spread across emerging markets and now across the globe. China used $45 billion from its FX Reserves to capitalize Export-Import Bank of China to facilitate Chinese companies expand globally. Another amount of $48 billion was used to increase the capital base of China Development Bank. There is growing speculation that the Chinese government could lower the GDP growth target to 6.5% from 7% for the next 5 year plan starting from 2016. On Friday PMI data showed that China's large manufacturing sector is slowing down sharply as PMI fell to 47.1 in August. While the Chinese Yuan has stabilized largely due to intervention by PBoC, it has drained liquidity from the system. This is because as PBoC sells US Dollars in the market, they are buying CNY from the market and taking that amount of liquidity from the banking system. This has forced the PBoC to inject liquidity into the system in the form of Repo's & medium term lending facility to the tune of $55 billion. It is expected that Chinese FX Reserves would fall by about $40 billion a year for the rest of the year if this trend of intervention due to capital flight out the country continues.

In Europe, Greece made the repayment of Euro 3.5 billon to the ECB after the first tranche of the bailout package was dispersed after all the Eurozone parliaments approved the third bailout package for Greece. This deal has created quite a bit of discord in Germany & Greece. In Germany Merkel faced a revolt from her party but managed to get the deal through parliament. In Greece, Syriza Party's Tsipras faced strong opposition from within his party for this bailout deal and he managed to pass this through parliament only with the support of the opposition, which means that his government could have lost its majority in parliament as some ministers openly campaigned against this bailout agreement stating that Tsipras has gone back on poll promises. PM Tsipras who remains fairly popular in Greece currently has called for snap elections to get a fresh mandate from the people and elections could be held on September 20.

Crude Oil prices plummeted lower after US stockpiles increased & Saudi Arabia reported record oil production in June. Increasing physical supply with the anticipation of Iranian crude hitting the market in a few months time put downward pressure on Crude Oil prices sending the WTI Benchmark below the lows seen in March breaking below the $40 a barrel level for the first time since 2009.

The Euro staged a smart rally and is poised to move further higher. In the report dated May 2, 2015 it was mentioned that the Euro could target levels around 1.2000 by the end of 2015. We now seem to be on track for that. The three prime drivers of the euro into the lows below 1.1000, were; Firstly, expectations of deflation in the Eurozone (which has substantially eased now). Secondly US rate hike possibilities in 2015 (which now seems more likely in 2016). Thirdly the possibilities of Grexit and the chaos post such an event (Greece has got its third bailout and this problem though not solved has certainly been pushed well further down the road).

The FOMC minutes were a bit ambiguous with a dovish tilt. "The Committee concluded that, although it had seen further progress, the economic conditions warranting an increase in the target range for the federal funds rate had not yet been met." The minutes mentioned "almost all members" of the Federal Open Market Committee "indicated that they would need to see more evidence that economic growth was sufficiently strong" to bring inflation closer to its target before they were ready to raise rates for the first time since the financial crisis. Many members were of the view that full employment was close & only needed to see "some more" improvement in the labor market before hiking rates.

US economic data was largely upbeat. Existing home sales for July increased by 2% (M-on-M) and at an annual pace of 5.59 million units was at highest level since 2007. Philadelphia Fed's Manufacturing Index for August at 8.3 was sharply higher from July's 5.7. Building permits for July were lower than expected coming in at an annual pace of 1.119 million. Inflation in the US remained benign with Core CPI for July growing 1.8% (Y-on-Y) but the headline number is very close to deflationary territory at 0.2%(Y-on-Y).

Concerns of global growth emanating from a China have rocked equity markets across the world this week. In last week's report it was mentioned that the death cross where the 50 Day moving average dipped below the 200 Day moving average was mentioned and it has lived up to its bearish reputation sending the Dow Jones Index further lower. US stocks had their worst week since 2011, we could see a pull back up next week, but it may not last and stocks could head lower again. The implication of the fall in the stock market for the US consumer is that we could see consumer confidence and spending slow down as investors see their portfolios take a big hit due to this correction in the stock market

The biggest gainer this week was gold as the risk averse mood in global equity markets and receding hopes of an early interest rate hike in the US boosted the appeal for precious metals. The risk aversion in markets sent the US Treasuries higher, sending yields lower across the board. The 10- year yield is back around the 2% handle.

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.