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Global Equities Gain On ECB Monetary Easing & Crude Oil Rally, ECB Cuts Rates Further Into Negative Territory


As widely expected Bank of Canada left interest rates unchanged at the monetary policy meeting this week. After two rate cuts last year to boost the economy, the BoC will wait to see what the Federal Budget will do to boost the economy through greater spending measures which will be released on March 22. This was reflected in BoC's statement "An assessment of the impact of the upcoming federal budget's fiscal measures will be incorporated into the Bank's April projection." Also "The near-term outlook for the economy remains broadly the same as in January" was the reference to economic outlook. At the January meeting GDP growth for 2016 was revised lower to 1.4% from 2%. At the April meeting there are some expectations of a cut in interest rates as the recent firming up of the Canadian Dollar gives some flexibility to BoC to cut rates to provide further monetary stimulus.

As per data from Statscan, Canada lost 2.3k jobs in Feb, which was quite belwo economist's consensus forecast at 9k. The details within this jobs data was even worse, with 51.8k full time jobs lost across Canada, which was offset by addition of 49.5k part-time jobs. A bulk of the full time jobs lost were in Ontario where 48.9k full time jobs were shed and 37.7k part time jobs were added. Unemployment rate hit a 3-year high at 7.3% increasing by 1 bps and is at the highest since March 2013. The Unemployment rate in Alberta headed higher to 7.9% which is the highest since August 1995. Another report by Statscan, the ratio of household credit market debt to disposable income (excluding pension entitlements) increased to 165.4% in Q4, which is another record high. Mortgage debt levels continued to head higher increasing by C$74.4 billion to C$1.262 billion, this pace of 6.3% is the fastest pace of growth since 2011.

Canada's Net International Investment position data from Statscan revealed that Canada posted positive net assets position with the US for the first time since 1990. This basically means that Canadian have more held in US, than what Americans have in Canada. The high savings rate in Canada, lack of investing opportunities in Canada, large pension assets and the fall in the value of the Canadian Dollar helped result in this surplus which was at C$82.2 billion at the end of 2015.

As per data from CMHC, Housing starts in February were sharply higher in Feb at 212,594 units, much higher than the 165,071 units in January. There was quite a bit of divergence in regional data, with housing starts in B.C. hitting the highest level since 1990. Ontario was the other market where housing starts were booming with 76k starts, which was largely led by multiple unit buildings in Toronto. The rest of the market showed marginal growth with the Prairies and Alberta showing contraction.

Canadian equities posted good gains on the back of rally in crude oil prices and on account of the global risk on environment after ECB's liquidity measures. Canadian equities were also supported by a rally in metal prices, from iron ore to copper with the large number of metal companies listed on TSX. Banks which constitute a large portion of market cap also performed well and largely better than expected quarterly results in this sector helped fuel the positive sentiment across the board.

With the return of the "risk-on" environment Canadian Bond yields especially at the long end, shot higher with the 10-year yield closing higher by 16 bps at 1.36% quite close to 1.39% where it started off in 2016, but in early Feb it had traded just under 1.00%. The bond markets shrugged of weak labor market data and focused on the sharp run up in crude oil prices over the last few weeks. The Canadian Currency was also influenced by the rally in crude prices trading a low of 1.3169 which was last traded in early November last year. These are good levels for Canadian Importers to hedge near and medium term imports. There are two factors that could send the Canadian Dollar weaker in the coming months. Firstly, higher than expected quantum of deficit in the fiscal budget which is schedule on March 22. Secondly, the Bank of Canada could ease sometime in the second quarter to support the economy and this will weaken the Canadian Dollar.


Moody's lowered Bahrain's rating to Ba1 which is below investment grade and retained its outlook at negative citing the relative small quantum of cash and oil reserves. Moody's also put the ratings for Saudi Arabia, UAE, Kuwait & Qatar for possible downgrade. Moody's acknowledged the vast amount of foreign exchange reserves that Saudi Arabia has, but large budget & current deficit and need to defend the FX peg are negative factors. Moody's acknowledged UAE's moves to diversify its economy away from petrochemicals & introduce tax reforms. Rating agency Standard & Poor's in February, had cut the ratings of Saudi Arabia, Oman & Bahrain, but retained the ratings & outlooks for UAE, Qatar and Kuwait citing strong accumulated reserves.

Saudi Arabia is in the market for a five-year loan of about $6 billion & $8 billion as per a report by Reuters. This loan is to bridge the large budget deficit resulting from the collapse in crude oil prices. In 2015, Saudi Arabia had a budget deficit which was estimated at around $100 billon and this year also it could be at similar levels. The recent rating actions by S&P and Moody's on Saudi Arabia will impact the pricing. In 2016, Oman & Qatar have raised similar loans at a price of 120 & 110 bps respectively, but the subsequent rating actions could mean that the pricing for this Saudi Arabia's loan could be higher.

The beleaguered SME sector in UAE could face some relief as the UAE Banking Federation (UBF) put forth a plan to help firms reduce debt. SME's with multiple loans experiencing difficult could opt to enter this scheme whereby lenders will coordinate their positions and work to assist the company in providing a temporary suspension of repayments and restructuring of future repayments. Rising bad debts from the large SME sector, which accounts for 86% of UAE's private sector workforce as per the Ministry of Economy, has been rising in recent quarters. This is putting pressure on bank earnings as most large banks have announced a big increase in provisions and write-offs for loans in this sector.


In India, the economic recovery continues to be tepid with a slowdown in Industrial output and car sales. Index Industrial Production (IIP) fell in January by 1.5% contracting for the third straight month, pulled down by a contraction of 2.8% in the large manufacturing sector. The mining sector grew by 1.2% and the electricity sector which has been booming due to reforms by the Power Ministry in this sector grew by 6.6%. The manufacturing sector which accounts for about 75% of IIP contracted by 2.8 pulling the entire Index lower. After posting record highs in 2015, Car Sales in India have started off to a weak start in 2016, with car sales contacting for the second consecutive month in February. Domestic passenger car sales in February 2016 was at 164,469 units as compared to 171,703 in February 2015 a fall of 4.21% as per data from the Society of Indian Automobile Manufacturers (SIAM). The reason cited by SIAM Deputy Director is the agitation in Haryana where the largest auto manufacturer Maruti Suzuki is based impacted output.

The Indian Rupee traded with a firming bias in a holiday shortened week as US Dollar inflows were strong and also on the back of exporter selling. FII inflows in the equity markets were to the tune of $554.77 on account of positive cues in the emerging markets space globally. Indian equities markets took a breather this week after the biggest weekly rally since 2009 in the previous week and consolidated. FII buying was soaked in by selling from domestic funds and investors who took some money off the table after the sharp post budget rally.

The Public Sector Banks have been in the limelight due to significant Non-Performing Loans and some high profile defaults which are being probed by some central agencies. Rating Agency CRISIL, downgraded ratings on securities of eight government owned banks and changed the outlook to negative for five other banks. The prime reason for this downgrade was expectations that the Non-performing loans issue could continue for a few more quarters and it estimates that about 11.3% of the total loan book could be categorized as "weak" by March 2017 up from an estimate of 7.2% as of March 2015.


China's FX Reserves dropped by $28.57 billion in Feb, slightly better than the $30 billion forecasted by economists. At the end of Feb reserves are at $3.2 billion which is the lowest level since December 2011. China's FX Reserves peaked at $3.993 trillion in June 2014 and is down by just under $800 billion in the past 20 months. Chinese exports in February posted the largest decline since 2009 of 25.4%. Imports on the other hand were down a more modest 13.8%. Exports in February were at $126.1 billion, though there could have been some impact due to the Chinese New Year, but January exports had also fallen by 11.2%. Imports for January fell to $93.56 billion and contracted for the 15th consecutive month. This is also the first time since January 2010 that imports were below the $100 billon mark. Weak Chinese data and comments by Chinese Policy makers indicating further fiscal spending to boost growth sent a few commodity prices higher, but later in the week higher than expected inflation data both at the consumer & producer level reduced expectations. Producer Price Index for Feb at minus 4.9% was under minus 5% for the first time since June of last year. At the consumer level CPI, jumped sharply higher to 2.3% (y-on-y) in Feb, well above expectations of 1.9% and January's level of 1.8%.

ECB had a double surprise for the markets when the ECB cut interest rates further into negative territory & at the press conference indicated that further cuts may not be needed, but added to caveat to this that this could change!! Interest rate on the deposit facility will be decreased by 10 bps to minus 40 bps & the interest rate on the main refinancing rate was cut by 5 bps to 0.00%. The quantum of Quantitative Easing was increased by Euro 20 billion to now stands at Euro 80 billion from April. Another important change was to the securities eligible for REPO, which now includes Investment Grade Euro-denominated bonds issued by non-bank corporations established in the Euro Area. This change could mean that we could see Euro Bond issuances from highly rate US Companies through their European entities. The ECB press statement and ECB President Mario Draghi's press conference produced gut wrenching volatility in the Euro, which initially fell by over 1.5% from 1.1000 levels to 1.0820 level and then rallied back higher to over 1.1200!!! A move of over 6 big figures in about 3 hours.

It was quite a thin week for data releases in US. In a reflection from the ground level where business conditions could be slightly deteriorating, the National Federation of Independent Business (NIFB) Small Business Optimism Index fell further lower to 92.9 for February, this had peaked at 100.4 in December 2014 and has trended lower since. US jobless claims were better than expected at 259k which is the lowest level since October last year. Continuing claims were also down sharply 32k to 2.225 million which denotes solid strength in the labor market.

Crude oil prices headed further higher this week as crude Benchmark trade over $40 for the first time since Dec, 10 last year. On the Technical charts the price action has moved above the 50-day moving average, which is a bullish indicator for short term price action. International Energy Agency (NASDAQ:IEA) mentioned that oil prices could have finally bottomed out. Another factor was that Goldman Sachs in a research note mentioned that there are "green shoots" of rebalancing between supply & demand are emerging. Supply side factors also helped boost prices with outages in Iraq, Nigeria & UAE due to various reasons. Talk of production freezes continued but with low possibilities of Iran & Iraq being part of this freeze it will not be really effective in curbing excess production.

The correlation between crude oil prices and equity prices continued to be strong this week too. Equities were also boosted by monetary easing from the world's largest economic bloc - Eurozone. The way forward to support & boost economic growth in Eurozone and Japan is getting murkier by the day as large amounts of quantitative easing and now negative rates both have not really made any significant dent in the economic downturn.

Compiled & Researched by: Shailesh N. Mulki

Disclaimer: This is not a research report and the views and information contained herein are the personal views of the author. These should not be taken to constitute advice or recommendation.