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FOMC Minutes & Fed Comments Increase Probability Of Dec 16 Rate Hike‏

Week ending November 21, 2015


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The slowdown in GCC has impacted the relatively large SME sector with defaults showing signs of increasing. As per a statement from one of the largest banks in UAE Emirates NBD, company owners are abandoning the country without repaying debt. As per the Chairman of the UAE Banks Federation & CEO of Mashreq Bank these "skips" could be about Dhs 5 billion ($1.36 billion). In the overall context this could wipe out a significant amount of the banking sector profits. The top 20 banks in UAE have made gross profits of Dhs. 29.4 billion in the first nine current year. The banking sector has loans and advances of Dhs. 1.48 trillion as of the end of October & the amount in question is just 0.33% of the overall lending book.

Sharjah based United Arab Bank, posted a loss of Dhs. 272.6 million ($74.21) in Q3 after a sharp increase in commercial loan defaults. In the same quarter last year it had posted a profit of Dhs. 169.2 million ($46.06 million). Moody's placed the bank on review for possible downgrade due to a sharp increase in non-performing loans and its number of senior management changes in the last 12 months. It is currently rated at Baa1 long term and has about 1.1% market share in the total assets of the banking sector in UAE. Shuaa Capital also reported a net loss of Dhs. 28.6 million ($7.78 million) in Q3 due to higher provisions on its SME loan book amid weakening economic sentiment. Last year it has reported a profit of Dhs. 26.2 million ($7.13 million) during the same period.

Equities in UAE recovered, from the steep fall on Sunday, during the week to actually close slightly higher. This is the first time that Dubai equities have posted growth since the week ending October 10. Emaar the Bellwether scrip in Dubai, recovered to close back over Dhs. 6.00. Emaar has diversified significantly over the last few year and it is no longer just a real-estate company, it derives just under 50% of its revenues from the hotels and retail business, in which it is a leading player in the market. For the long term investor it could be a good time to accumulate fundamentally strong stocks at good valuations.

In India, for the second consecutive week, the Federal Government announced several policy measures to boost economic growth. The Cabinet Committee on Economic Affairs(CCEA) announced an IPO for Cochin Shipyard & a 10% stake sale in Coal India. To support exports a five year interest subsidy scheme was announced. Exporters will get a 3% subsidy on pre and post-shipment credit for exports. While this measure will help exporters to some extent the key hindrance to scaling up of exports is the bottlenecks in basic infrastructure like highways, ports and complicated regulatory environment. To boost the infrastructure sector the CCEA approved railway projects of about $1.5 billion, revived 34 stalled national highway projects worth $5.3 billion. The 10% stake sale in Coal India limited will be worth about $3.2 billion and will go a long way in achieving the disinvement target of $10.5 billion targeted for the current fiscal year. It is quite possible that the government will fall short of this disinvestment target which will put pressure on the fiscal deficit. The pay commission report which regulates salary increments for government and some public sector employees like railways provided for a large increase, which again will put pressure on the fiscal deficit. The two large structural deficits in India: fiscal and trade, were both in focus this week.

India's exports contracted for the 11th consecutive month and is down 17.5% from $25.9 billion in October 2014 to $21.3 billion. Imports on the other hand were down even more at 21.2% from its October 2014 level to $31.1 billion. This helped push the trade deficit lower to $9.8 billion. The biggest dip in exports came from petroleum products (down 57.1% largely a price effect due to the slump in crude oil prices). Even after this large drop, petroleum product exports constitute over 10% of overall exports at $2.5 billion. Pharma exports posted strong growth of 21.5%. On the import side crude oil imports have fallen 45.31% due to lower prices, also Gold & Silver imports have fallen 59.55% & 51.51% respectively. If we strip out crude, gold & silver the rest of the imports basket is up 0.82% which does show that domestic demand is not getting any worse, if not much better.

Indian stocks closed up for the week after losing ground in the previous three weeks on account of the surge in auto stocks on the back of buoyant auto sales for October, the measures announced by the government also helped. The gains this week were inspite of Foreign Institutional Investors (FII's), who are large players in the market, being net sellers of $485.03 million worth of Indian equities.

The Indian Rupee traded a rather narrow range between 65.84 to 66.36 through the week amid lack of market moving factors. India's FX reserves have proven to be resilient since August, though it is possible that the Reserve Bank of India (RBI) did use some amount to manage the volatility of the currency. As per data from RBI, for the week ending November 13, FX reserves increased by $780.9 million to $352.515 billion, which is not far from the record high of 355.46 billion in June this year.

In another sign that global trade is slowing down and this is largely emanating from the world's largest manufacturer China, the Baltic Dry Index fell to 504 with is the lowest level since 1985. It is costing lesser to ship good now than at any time in the last 2 decades due to slump in demand for shipping iron ore, coal and other commodities amid a glut in ship production which has continued from the 2005-07 boom. Over the last 10 years, largely before the financial crisis there was a massive increase in ship building amid record demand for commodities and the global slowdown has resulted in a glut on the supply side which has pushed shipping rates to record lows.

The FOMC Minutes of the October FOMC meeting revealed that while the December rate hike is becoming more likely, it emphasized that the path of interest rates hike would be slow and gradual and that this path is more important than the initial increase. The key statement in the minutes was "most Fed officials feel liftoff conditions could be met by December." This means that there is broad consensus that we could see the first rate hike in December barring any shocks to the system before that. In Europe the tone was at the other end of the horizon, with ECB President Mario Draghi clearly dropping more hints that ECB will expand its Quantitative Easing measures. Here the key phrase that the ECB President used was "we will do what we must to raise inflation as quickly as possible." The tone of these two messages sent the EUR/USD sharply lower and calls for the EUR/USD to drop below parity has started coming in.

Not much in terms of market moving economic data this week in US. Inflation as measured by CPI increased by 0.2% in October(Y-on-Y), there is a large impact of the energy prices in the headline number and we will see this abate from next month as crude oil prices fell from November last year. Stripping off volatile food & energy prices the core inflation rate remained at 1.9% (Y-on-Y). Industrial Production fell 0.2% in October dragged down by weakness in utilities and mining. The housing market which has been quite strong this year, pulled back a bit with Housing starts in October falling 11% to 1.060 million.

Fed talk this week seemed like the FOMC members are preparing the market for a rate hike. FOMC Vice-Chairman and New York Fed President who has a permanent voting seat was quite hawkish in his comments on Friday stating "The Federal Reserve should soon be ready to raise interest rates." He also reiterated some of the FOMC members statement on an expected rebound in inflation "We hope that relatively soon we will become reasonably confident that inflation will return to our 2 percent objective." He went on to add that "It was very logical to expect that the Fed's inflation and employment conditions would be met soon." FOMC voting member Dennis Lockhart was also quite hawkish in his comment "I'm comfortable with moving off zero soon" and went to add "It seems appropriate to begin a new policy phase and the US economy has shown solid signs and a rate hike should affirm that the economic outlook is positive." Fed Vice Chairman Stanley Fischer also was hawkish in his tone when he stated that "some major central bank could move away from near-zero interest rate policy in the relatively near future." He went on to add "We have done everything we can avoid surprising the markets and governments when we move" The US 2-Year Treasury yield which is most sensitive to Fed rate hikes, traded at its highest level since May 2010 to close the week over 0.90%.

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.