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Weaker Loonie Attracts M&A From The US, Equities Retreat & Economic Data In US Softens

CANADA

The Canadian Dollar posted gains for the second consecutive week riding the wave of higher crude oil prices and a weaker US Dollar. The strengthening of the Canadian Dollar could provide a good opportunity for Canadian Importers to hedge exposures with the Canadian Dollar even trading below 1.3700 during the week. The last time the USD/CAD traded below this level was on Dec 15, 2015. While the USD/CAD will be impacted by crude oil prices, the other factor is that if the US economy weakens it will have spillover effects on the Canadian economy with US contributing about 70-75% of both exports and imports. The other two factors to watch out this year are; firstly, the size of the fiscal deficit in the Federal Budget which will be announced in March. Secondly, Bank of Canada could cut rates further during the year if economic weakness persists. Both these factors could result in further weakening of the Canadian Dollar. The only factor that could substantially strengthen the Canadian Dollar is a rally in crude oil prices, which in turn depends on the willingness that Saudi Arabia, Iran and Russian have in cutting production. Overall the risk of being unhedged for Canadian Importers far outweighs the risk of not doing so, given the outlook for the current year.

The weak Loonie is expected to result in a strong flow of Mergers and Acquisitions (M&A's) emanating from the US. In a sign of this trend emerging, we witnessed American Home improvement chain Lowe's make a friendly takeover of Canadian rival Rona in a deal valued at $3.2 billion. The deal was quite attractive for retail investors also as at $24 a share it was about twice the value at what it was quoting before the offer was made on Tuesday. The fall in the Canadian Dollar has made it attractive for US companies to make bids for Canadian companies and it is a win-win for Canadian shareholders who are selling their stakes at a substantial premium.

Canadian economic data was mixed this week. RBC's Manufacturing PMI for January rebounded sharply higher to 49.3 from December's 47.5 indicating the positive impact of the weak currency on the manufacturing sector. Canada lost 5.7k jobs in January, but the details were not as bad. Full time jobs added were 5.6k and part time jobs lost were 11.3k. Ontario added 20k jobs in January and was the only province with employment growth. Alberta lost the most jobs at 10k and its unemployment rate moved higher to 7.4% which is the highest since Feb 1996 and it is only the first time since Dec 1988 that Alberta's unemployment rate was higher than the national average. The unemployment rate edged higher by 1 bps to 7.2%. The weaker Canadian Dollar boosted Canadian exports resulting in a lower than expected trade deficit. Exports jumped 3.9% to $45.35 billion and was up by $1.499 billion over the Dec 2014 number. The slack of $2.2 billion in crude oil exports was made up by an increase of $1.76 billion in motor vehicles and parts and an increase of $1.147 billion in export of consumer goods. In December, imports were up 1.6% at $ 45.935 billion.

The TSX was influenced by the volatility in the energy sector with stocks moving in tandem with global crude oil prices. The gold sector in TSX moved higher on the back on higher gold prices. Overall it closed marginally lower, impacted by the weaker than expected jobs numbers in both Canada & US. The Canadian Dollar yield curve trended further lower and the ten-year yield is back to levels where it was, before if rallied from, after Bank of Canada held rates steady in January.

UAE

Dubai International Airport retained the top positon as the world's busiest airport handling 78 million passengers in 2015. In 2015 the airport posted growth of 10.7% in international passenger traffic and aircraft movements were up 14.1% at just over 400k. The top destination from Dubai international airport was India & this segment posted growth of 17%. UK and Saudi Arabia were the other two destinations in the top 3.

The turmoil in emerging markets has resulted in credit spread moving sharply higher and liquidity tightening in global markets. This has had its impact in the regional Sukuk & Bond issuances where we have witnessed one issuance from the Emirate of Sharjah in Mid-Jan which was oversubscribed by just under 2 times. Jeddah headquartered Islamic Development Bank (IDB) which was formed to combat poverty in the member states of Organization of Islamic Countries, could be the next to issue Sukuk's. The benchmarked sized issuance is expected to the launched in the first quarter and it has shortlisted banks to arrange this US Dollar denominated Sukuk. Rating agency Standard & Poor's has forecasted a drop in Sukuk issuances this year to $50-55 billion from $63.5 billion last year. There are two factors that could change this, if Crude Oil prices remain low we could see sovereign Sukuk issuances to fund deficits & with lifting of sanctions, issuances from Iran could emerge.

Equity markets in the region staged a strong rally for the second consecutive week, spurred on by a rally in crude oil prices and value buying as attractive valuations lured in long term buyers. The Middle-East's only listed stock exchange Dubai Financial Market (DFM) reported an 89% plunge in Q4 net profit indicating that trading volumes plunged in the wake of the prolonged slump in crude oil prices. The large banking sector reported mixed results with several multi-national banks cutting jobs and the outlook for the overall economy weakening. After the large rally we have witnessed in the last two weeks, investors could turn cautious in adding to further long positions as most markets do not have a mechanism to short sell or sell Index futures to hedge positions.

INDIA

In India, economic data is showing some more signs of a pickup in momentum. Markit's Manufacturing PMI for Jan moved back into expansion territory over 50.0 at 51.1. Services PMI also increased further to 54.3 in Jan from December's 53.6. Infrastructure output moved back into positive territory growing 0.9% in December, after the contraction in November. Bank loan growth for two week ending Jan 29 outperformed deposit growth for the third consecutive fortnight at 11.4% and 11.1% respectively. FX Reserves increased by $1.59 billion to $349.15 for the week ending Jan 29, showing resilience inspite of the turmoil in global markets. Foreign Institutional Investors (FII's) notched the first week in 2016, where the net flows were positive at $307.16 billion, with a large portion of that $217.88 flowing into the debt market.

At its monetary policy meeting, Reserve Bank of India (RBI) left interest rates unchanged. RBI Governor Raghuram Rajan mentioned "The Indian economy is currently being viewed as a beacon of stability because of the steady disinflation, a modest current account deficit and commitment to fiscal rectitude. This needs to be maintained so that the foundations of stable and sustainable growth are strengthened," The RBI indicated that it would wait until the government's annual budget which is scheduled in end Feb, before taking additional measures. The government has targeted fiscal deficit at 3.9% for the current fiscal year ending in March and 3.5% for the next. The RBI Governor had earlier in the week warned against targeting aggressive growth using debt, leading to higher fiscal deficit. He also warned that if fiscal consolidation is not that achieved it will hurt stability and quoted the example of Brazil in this regard.

The Indian economy has escaped much of the turmoil being faced in other emerging markets like Brazil, Russia, China, Malaysia amongst others. This is because of low reliance on exports and growth is driven by domestic demand which is slowly emerging from a slump of over 3 years. The Indian Rupee has been comparatively stable and FX reserves have fallen only marginally since scaling new all-time highs in June last year.

Indian equities posted their fourth weekly loss this year, on account of the steep fall on Tuesday after RBI refrained from cutting rates. The Indian Rupee depreciated sharply to 68.27 by Wednesday, but posted sharp gains to close below the key 68.00 level. The gains were driven by weakness in the US Dollar in global markets & exporter selling.

GLOBAL MACRO

Oil Prices had a wild ride this week, after collapsing lower in the early part of the week as Iran announced plans to ramp up production from March. On Wednesday, prices shot higher after Russian officials reiterated willingness to meet if there was consensus among the OPEC & Non-OPEC members on cutting production. On Thursday, with no clear indication coming from Saudi Arabia regarding the proposed meeting between OPEC & some Non-OPEC members in Feb, crude oil price retreated lower.

China's GDP target for 2016 for the first time since the 1990's was set at a range instead of a particular number, at 6.5-7%. After growing at 6.9% in 2015, this range gives policy makers some flexibility and prepares the market also for a lower number. China's large manufacturing sector showed further signs of weakness as the official PMI slipped lower to 49.4, but Caixin's PMI showed an increase of 2 bps to 48.4 in January.

South Korean International trade data which is used as a barometer of global trade, slumped sharply in Jan. South Korean exports slumped by 18.5% in January to $36.7 billion and this was the largest decline since the Financial Crisis period in August 2009. About 25% of China's exports are to China and with the Chinese economy slowing down it is spreading this weakness to its trading partners. The last time Korean exports showed positive growth was in Dec 2014. With petroleum product exports forming about 15% of all exports in Korea, the fall in prices also had some impact. Imports for January fell by 20.1% to $31.4 billion showing weakness in both domestic and re-export demand.

FOMC members are getting concerned about the volatility in financial markets and weakening global growth. FOMC Vice-Chair William Dudley, became the second FOMC member to speak about this. He also raised concerns that financial conditions have tightened considerably since the Dec Fed rate hike & that the strength of the US Dollar could have "significant consequences" for the health of the US economy. Dallas Fed President Robert Kaplan had raised concerns about the widening of credit spreads in the corporate bond market even for higher quality issuers.

US economic data was weaker than expected this week, raising concerns that the only major world economy that this performing well is also headed for a slowdown. The all-important January jobs report disappointed with 151k jobs added in the economy, below market consensus of 188k. Revisions for the previous two months were significant but in opposite directions which resulted in net loss of 2k jobs. This was the 64th straight month of job gains in the US and way ahead of the previous record of 48 months in the 1990's. The unemployment rate which is derived from a survey of households dipped lower to 4.9%. This is the lowest it has been since Feb 2008 and is slowly pushing up wage inflation. There was some hint of wage inflation with Average Hourly earnings increasing by 0.5%(M-on-M) with the annual pace of increase being 2.5%. The broader unemployment rate U-6 was unchanged at 9.9%. ISM's manufacturing Index was below expectations at 48.2. Jobless claims have started to trend higher with the 4-week average moving higher to 285k after touching lows around 260k in October last year. Personal Income posted sharp gains of 0.3% in December, but Consumer spending the key engine of growth in the US was below expectations with a flat reading. This in turn moved the savings rate to 5.5% which is at the highest since December 2012.

The big gainers this week were precious metals with Gold & Silver up 10.8% & 8.9% respectively from the start of this year. Gold is an interesting commodity currently as it has its lure when markets are in turmoil & risk averse. In the current situation it has another feature that gold lease rates are still in positive territory as compared to Government Bonds in Eurozone, Japan, Switzerland, amongst others which have negative yield. Expectations of rate hikes ebbing in the US is also supportive for gold prices.

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.

Source: Bloomberg.com, Investing.com