First Abu Dhabi Bank: Market Insights and Strategy Global Markets - 7 March

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1. FAB morning news summary Global News 07 March 2018 Chavan Bhogaita Head of Market Insights & Strategy Rakesh Sahu Analyst Please click here to view our recent publications on MENA and Global Markets • US factory orders post biggest drop in six months: New orders for USmade goods recorded their biggest decline in six months in January and business spending on equipment appeared to be slowing after strong growth in 2017. Factory goods orders fell 1.4% amid a broad decrease in demand, the Commerce Department said on Tuesday. That was the largest drop since July 2017 and followed five straight monthly increases. Factory orders rose 1.8% in December. January's drop in orders was broadly in line with economists' expectations. Orders surged 8.4% on a year-on-year basis. Orders for non-defense capital goods excluding aircraft, which are seen as a measure of business spending plans, fell 0.3% in January instead of declining 0.2% as reported last month. Orders for these so-called core capital goods decreased 0.5% in December. That was the first back-to-back drop since May 2016. Shipments of core capital goods, which are used to calculate business equipment spending in the gross domestic product report, slipped 0.1% in January instead of edging up 0.1% as reported last month. Core capital goods shipments increased 0.7% in December. Business spending on equipment is cooling after growing by a robust 4.8% in 2017. But it is likely to remain supported as companies are expected to use some of their windfall from a $1.5tn tax cut package to buy machinery and other equipment as they seek to boost sluggish productivity. The Trump administration slashed the corporate income tax rate to 21% from 35% effective in January. The tax cuts, a weakening US dollar and strengthening global economy are expected to support manufacturing, which makes up about 12% of the US economy. Source: Reuters; CNBC • Fed's Kaplan says rate hikes are necessary as the US nears full employment; favours three rate hikes this year: Raising interest rates now gives the US the best chance to keep pushing the economy forward, Dallas Fed President Robert Kaplan said Tuesday. In that light, Kaplan said he favours three rate hikes this year, a sentiment reflected in markets that nevertheless have been wary that the central bank may get more aggressive should the improving economy start generating more noticeable inflation. "It's three for this year. I think we should get started sooner rather than later, though," he said during an interview on CNBC's "Squawk Box." A March rate hike is nearly a certainty judging by trading in the fed funds futures market. A subsequent hike is expected in June, with a third likely coming in September, according to the CME's FedWatch tracker. Whether the Fed goes for a fourth move is still in doubt, though it currently has about a 1 in 3 shot. Fears of a more aggressive central bank have helped roil a market that had been showing an extraordinarily low level of volatility prior to 2018. In Kaplan's view, consistent hikes are necessary especially with the unemployment rate at 4.1%, which he and other Fed officials consider to be right around full employment, or the point where nearly everyone looking for a job has one. "We think the unemployment rate is going into the 3s during 2018. ... We are either at or below full employment right now," he said. "On the bright side, it means more people will have jobs. It should lead to some pressure." "But the thing I'll be watching is the history of overshooting full employment in the United States and having a soft landing is not a long history. So the reason I want to start removing accommodation, raising the fed funds rate, is I think that will give us the best chance to extend this expansion for longer." On another issue, Kaplan said President
2. overshooting full employment in the United States and having a soft landing is not a long history . So the reason I want to start removing accommodation, raising the fed funds rate, is I think that will give us the best chance to extend this expansion for longer." On another issue, Kaplan said President Donald Trump's plans, announced last week, to slap tariffs on imported steel and aluminium "could have some chilling effect" on trade relations with Mexico and Canada. Trump has said that he might back off on the tariffs if the nation's NAFTA partners provide some US-friendly concessions on the pact that took effect in 1994. "It's so clearly in the interests of the United States to have strong trading relationships with both those countries. I'd be optimistic about how this actually gets implemented," Kaplan said. Source: CNBC • Trade skeptics gain upper hand in White House as Cohn quits: Economic nationalists appeared to gain the upper hand in a White House battle over trade with the resignation of Donald Trump’s top economic adviser, Gary Cohn, on Tuesday in a move that could ramp up protectionist measures that risk igniting a global trade war. Cohn did not spell out the reasons for his resignation. He had told Trump that markets would slump on a tariffs threat and was regarded as a bulwark of economic orthodoxy in an administration whose protectionist policies have sparked alarm among US legislators and in governments around the world. Cohn’s resignation came after Trump said he was sticking with plans to impose hefty tariffs on steel and aluminium imports. While the measures on their own are relatively small, the risk is that an emboldened Trump administration will push ahead with a full-scale economic confrontation with China. America’s trade deficit with China hit $375.2bn in 2017, equivalent to two-thirds of the country’s total trade deficit of $566bn. Trump has said he will remedy what he terms the jobs- and industry-destroying deficits. “The economic nationalists now certainly have the upper hand and their camp is bigger. I think they are going to be very influential in the administration,” said Monica de Bolle, a senior fellow at the Peterson Institute for International Economics, a Washington-based think tank. The Trump administration has launched an investigation into intellectual property abuses by China, which could dwarf any impact of the steel and aluminium proposals and trigger a sharp response from Beijing. Trump has said the fines could be huge. A Reuters article reportedly said, with Cohn’s departure, the profile of Peter Navarro, an antiChina economist who favours protectionist measures, appears to have risen within the White House. Despite a rising tide of criticism from Republican lawmakers about the proposed 25% tariff on steel imports and 10% on aluminium imports, Trump on Tuesday reiterated his plan for the tariffs. Given the size of America’s trade deficit, Trump said the country would not be a loser in any fight. “When we’re behind on every single country, trade wars aren’t so bad,” he said at a news conference at the White House with the Swedish prime minister. Treasury Secretary Steven Mnuchin asserted on Tuesday that the US is not provoking a global trade war but instead wants its companies to get equal treatment in other countries. "We're not looking to get into trade wars. We're looking to make sure that U.S. companies can compete fairly around the world," the Treasury chief told a House Appropriations subcommittee. Source: Reuters; CNBC • Australia Q4 GDP growth slows to 0.4%; RBA's Lowe reiterates `no strong case' for interest-rate move: Australia’s economy grew at a slower pace than expected in the fourth quarter as a rebound in household consumption was offset by a fall in exports. The country’s gross domestic product grew 0.4% quarter on quarter in the three months through the end of December, slowing from 0.7% growth in the previous quarter, according to the Australian Bureau of Statistics. That was below a median of economists’ estimates compiled by Reuters forecasting 0.6% growth. Household consumption grew 1% during the period while exports of rural goods and transport equipment fell and construction of homes was also lower. In year-on-year terms, GDP grew 2.4% in the fourth quarter, short of the 2.5% growth forecast and at a slower rate than the 2.8% pace recorded in the previous quarter. The GDP release came shortly after Reserve Bank of Australia Governor Philip Lowe reiterated that there isn’t a strong case to adjust monetary policy in the near future. The economy is “moving in the right direction” and the next interest rate move was likely to be “up, not down,” the governor said in an Australian Financial Review summit in Sydney Wednesday. The central bank on Tuesday left interest rates at a record low 1.5% for the 17th meeting, a record period of stability designed to encourage progress in reducing the jobless rate and boosting inflation. Lowe said Wednesday that this process would be “only gradual” even as he forecasts improvements in both. Traders pushed out bets on Australia’s next interest-rate hike as economic growth missed forecasts and fears of a global trade war mounted, a Bloomberg News article reported. Lowe 2
3. lashed out at US tariff proposals in the conference , urging targeted nations not to respond. “This could turn very badly though if it escalates,” Lowe told a conference in Sydney Wednesday. “If we see retaliation and a counter retaliation, this could turn into a very big shock for the global economy.” Source: Financial Times; Bloomberg • Yen and treasuries gain while shares drop with dollar as key Trump adviser's departure heightens trade war fears; Oil dips on inventory fears and trade war risk: The yen, US treasuries climbed while global stocks and the dollar slumped on Wednesday as global trade-war concerns intensified after a key advocate for free trade in the White House announced his resignation, fanning fears President Donald Trump would go ahead with tariffs and risk a trade war. The yield on 10-year treasuries declined more than two basis points to 2.858%. Australia’s 10-year yield dropped two basis points to 2.80%. In the currency market, the dollar fell as much as 0.6% to 105.45 yen, near its 16-month low of 105.24 touched on Friday. The dollar had risen to 106.470 on Tuesday amid speculation that Trump could be coaxed away from imposing tariffs. Against the Swiss franc, the dollar also shed 0.3% to 0.9375 franc, while the euro edged up 0.05% to $1.2412. The Canadian dollar and the Mexican peso tumbled as Cohn’s departure was seen as raising risks Washington could walk out of NAFTA. The Canadian dollar fell 0.5% to C$1.2936 per dollar while the Mexican peso dropped 0.5% to 18.83 to the dollar. Stock indexes from Tokyo to Hong Kong swung from losses to gains and back again, while S&P 500 Index futures fell over 1%. The Topix index fell 0.5% in Tokyo and the Nikkei 225 Stock Average lost 0.7%. Australia’s S&P/ASX 200 Index fell 1% and South Korea’s Kospi index was flat. The MSCI Asia Pacific Index was down 0.2%. Oil fell after an industry report raised concerns over growing US crude inventories, and as risk assets slid on mounting fears over a trade war sparked by President Donald Trump. WTI futures in New York dropped as much as 1.2%, the first decline in four days. The American Petroleum Institute was said to report US crude inventories rose by about 5.7 million barrels. Jitters also grew after Gary Cohn, seen as a force for stability, resigned as economic adviser to the White House, a move that came as Bloomberg News reported the Trump administration is considering clamping down on Chinese investments in the US. WTI was trading at $62.12, down 50 cents or 0.8%. The contract rose 3 cents to $62.60 on Tuesday. Brent fell 0.8% or 53 cents to $65.26. Prices added 0.4% to close at $65.79 on Tuesday. Source: Reuters; CNBC Middle East & Africa News • Sharjah launches a 10-year $1bn sukuk at MS+135bps: The Government of the Emirate of Sharjah, acting through Sharjah Finance Department, launched a $1bn 10-year REGS Sukuk on Tuesday at a spread of 135 basis points over benchmark mid swap rate. The emirate released the price guidance for the sukuk earlier on Tuesday at MS+150bps area. Sharjah is rated A3/Stable by Moody’s and BBB+/Stable by S&P. Dubai Islamic Bank, HSBC, Sharjah Islamic Bank and Standard Chartered Bank were the bookrunners for the deal. Source: Bloomberg • Union National Bank prices a 5-year $500m bond at MS+135bps: Union National Bank (UNB) priced a 5-year $500m bond on Tuesday offering spread of 135 basis points over benchmark mid swap rate. Initial price thoughts for the bond was announced at MS+150bps area. The bond was issued at a reoffer price 99.601 offering yield of 4.089% and coupon of 4.00%. Pricing spread over benchmark US treasury (T 2 ⅝ 02/28/23) was 144.9 basis points. ANZ, Commerzbank, First Abu Dhabi Bank, HSBC, Mizuho and Standard Chartered Bank acted as the Joint Lead Managers and Bookrunners for the deal. UNB is rated A1 by Moody's and A+ by Fitch (both stable outlook). UNB is 50% owned by the Government of Abu Dhabi and 10% by the Government of Dubai. Not for release, publication or distribution in whole or in part to the United States or any other jurisdiction where it would be unlawful to do so. Please refer to the announcements which we distributed yesterday. Source: FAB • Al Ahli Bank of Kuwait hires banks for AT1 bond: Al Ahli Bank of Kuwait has mandated Citi, HSBC and JPMorgan as joint lead managers and joint bookrunners to arrange a series of fixed income investor meetings in Asia, the UAE and London, Bloomberg News reported Tuesday. Meetings will start from March 3
4. 8 and an inaugural USD Regulation S only perpetual non-call five-year unrated Additional Tier 1 bond offering will follow , subject to market conditions. Al Ahli Bank of Kuwait rated A2 by Moody’s and A+ by Fitch (both stable). Source: Bloomberg • Abu Dhabi inflation rises to 4.7% in January following VAT roll-out: Inflation in Abu Dhabi rose 4.7% in January on an annual basis as a decline in rentals tempered the 5% VAT implemented at the beginning of the year, according to official data. Month-on-month, prices rose 3%, Abu Dhabi's Department of Economic Development (DED) said. The consumer price index rose to 112.7 in January 2018 compared to 107.6%, the DED said in a statement on Tuesday. The gains were also propelled by a 100% excise tax placed on fizzy drinks and tobacco in October. The department said rental rates dropped 2.7% but otherwise didn't give a detailed breakdown of January inflation figures. "The increase in consumer prices inflation is completely reasonable compared to the results of January 2017 as a result of the implementation of the value added tax in the country at 5% which started last year," the DED said. In January the UAE implemented VAT as part of the country's efforts to diversify its sources of income. Authorities in the Emirates have also reduced energy subsidies which has led to an increase in prices. However, the rise in energy and the increase in goods and services has also been accompanied by a decline in housing costs, which have a 31.2% weighting in the inflation index. Citing government officials, The National reported that VAT is expected to net an estimated AED 12bn in the first year and AED 20bn in the second year of the levy. That's likely to give a shot in the arm to the economy, and will ultimately boost hiring, according to economists. Source: The National • Qatar GDP growth seen at 2.6% in 2018, says IMF: Qatar’s GDP growth is expected to grow at 2.6% in 2018, said the International Monetary Fund (IMF), noting that the country’s medium-term macro-financial outlook will remain broadly favourable. While the implementation of the public investment program and the ease in the pace of fiscal consolidation would help support growth, the continuation of the diplomatic tensions could weigh on confidence, IMF added in preliminary findings of IMF staff at the end of an official visit to Qatar. The fund said direct economic and financial impact of the diplomatic rift between Qatar and some countries in the region is fading. Following the rift, foreign financing (non-resident deposits and interbank placements) and resident private sector deposits fell by about $40bn. This decline has been offset by liquidity injections by the central bank and public-sector deposits, particularly from Qatar Investment Authority (QIA). The decline in non-resident liabilities of banks has abated, obviating the need for further support of the Qatar Central Bank (QCB) and QIA to the banking system, as banks mobilise funding from other (non-GCC) sources, the IMF said. According to the IMF, an escalation of the diplomatic rift could adversely affect external funding and growth, but the fund added that banks’ balance sheets can withstand sizable shocks, financial buffers at the disposal of the authorities can provide additional support, if needed. Source: Trade Arabia • Etisalat plans $2bn buyback as board recommends buying back of up to 5% of paid-up capital: Etisalat, the biggest telecommunications company in the United Arab Emirates, is seeking to buy back stock valued at as much as $2bn. The board of Emirates Telecommunications Group, also known as Etisalat, recommended purchasing up to 5% of the phone operator’s paid-up capital, or 434.8 million shares, the Abu Dhabi-based company said in a statement. The buyback is intended for canceling or reselling the shares, it said, without providing the terms. Etisalat, which competes with Dubai-based Du at home, runs operations in countries ranging from Pakistan to Egypt. It has a market capitalisation of about AED 151bn ($41bn) and based on Monday’s closing share price the buyback will be valued at AED 7.5bn. Source: Bloomberg • Saudi bourse courts foreigners as it readies for oil giant's IPO; Exchange seeks as much as 25% foreign ownership in two years: Saudi Arabia’s stock market is on a charm offensive as it prepares for what could be the world’s largest initial public offering, a Bloomberg News article reported Tuesday. The exchange, known as Tadawul, aims to boost foreign ownership of equities to as much as 25 percent in at least the next two years from about 4 percent, Chief Executive Officer Khalid Al Hussan said in an interview in London, where he attended a Saudi Arabia investment conference organized by Goldman Sachs Group 4
5. Inc . The bourse currently has about 120 registered Qualified Foreign Investors – who are allowed to trade Saudi stocks directly – and is reviewing applications of 180 more, he said. “It will be great if one day our 49% foreign-investor limit is challenged but ideally, we will be satisfied if in the next two years or more, we have about 20 to 25% foreign ownership in our markets,” Al Hussan said. “We are telling global investors that our markets are open and are consistently encouraging them to invest with us.” The world’s biggest oil exporter has embarked on a range of reforms to diversify its economy after a plunge in crude prices crippled the nation’s finances. The reforms include a potential listing of Saudi Arabian Oil Co., the kingdom’s crown jewel, in the hope it will attract more international investors to its bourse and boost capital market activity. As part of its plan to revamp the economy and reduce dependence on oil revenue, Saudi Arabia is seeking inclusion in MSCI Inc.’s emerging-market gauge. A decision from MSCI on whether the kingdom is on the index provider’s review list is due in June. The bourse is also seeking a similar status from index provider FTSE Russell. “Index inclusion for us isn’t a question of if but of when,” Al Hussan said. “We are confident that we have taken all the necessary remedial measures which has been pointed out to us by the providers.” Saudi Arabia will have a potential weighting of 2.3% on MSCI’s emergingmarket index, the third largest in the Europe, the Middle East and Africa, the index provider said last month. Based on that, an inclusion could result in inflows of about $30bn to $40bn, Al Hussan said. The exchange is also prepared to host the initial public offering of Aramco and doesn’t see any significant liquidity concerns arising from it, Al Hussan said. He referred to the $6bn share sale of National Commercial Bank in 2014, which had demand of about $80bn to $85bn from Saudi Arabian investors alone. An anticorruption crackdown by the country, which resulted in the arrests of Prince Alwaleed Bin Talal and other billionaires, has only boosted investor confidence in the economy, Al Hussan said, adding that QFI applications increased significantly in the two weeks after the crackdown. Source: Bloomberg • Gulf stocks markets mixed on Tuesday; Egypt hits record high: Gulf stocks were mixed on Tuesday, while outside of the Gulf, Egypt's index continued to climb reaching an all-time high as it benefits from the central bank’s decision to cut interest rates last month, the first time it has done so since letting the currency float freely in 2016. The Egyptian exchange closed at 16,012.66 points, up 1.99%, fuelled by gains in the consumer and real estate sectors. Stronger global stocks on Tuesday – with US President Donald Trump facing increasing pressure to pull back from a proposed increase in steel and aluminium tariffs – had a positive effect on the Saudi market, which was also boosted by gains in the petrochemical sector due to steady oil prices. The Tadawul climbed 0.96%, with petchem companies such as Saudi Basic Industries Corporation (Sabic) gaining 1.5% and Saudi International Petrochemical Co up 0.9%. Banks were also all up, with Al Rajhi Banking & Investment Corporation seeing the highest trading volumes in the sector and climbing 1.32%, while Arab National Bank was the top gainer, jumping 3.7%. The Qatar market lost 0.29%, despite initial gains. Vodafone Qatar was the worst performer, losing 3.76%. The company’s board announced last week a decision to reduce the share capital of the company by halving the nominal value of the company to 5 riyal per share. The real estate sector also weighed on the index, with United Development Company and Barwa Development Company losing 1.79% and 0.88% respectively. The Dubai exchange was broadly flat, losing only 0.05%. Abu Dhabi, though, slipped 1.87%, pulled by First Abu Dhabi Bank which dropped 6.47% as the stock went ex-dividend. FAB announced a cash dividend of 0.7 dirhams. On the ex-dividend date, the exchange reduces the stock price by the amount of the dividend to account for the fact that new investors are not eligible to receive dividends and are therefore unwilling to pay a premium. Etisalat shares gained 2.6% as the company announced share buyback. Elsewhere in the Gulf, Kuwait and Bahrain index closed flat and Oman index dropped 0.81% Source: Reuters • Lebanese dollar reserves recover from last year's crisis: The Lebanese central bank's dollar reserves grew in early 2018, recovering from a decline during a political crisis last year that pushed up interest rates, its governor said on Tuesday. Reserves climbed by $1.4bn in the first two months of the year and total assets in dollars exceeded $43bn, Governor Riad Salameh said at an economic conference in Beirut. "With the rise of interest rates and the return of political issues to normal, the dollar reserves at the central bank rose," he said. November's political crisis was triggered by the sudden resignation of Prime Minister Saad al-Hariri during a trip to Saudi Arabia, before he returned to the country and resumed his role. The crisis raised questions about Lebanon's economic stability and put pressure on the Lebanese pound's peg 5
6. to the dollar . Lebanon has one of the world's most indebted governments measured against the size of its economy. Growth has been slowed by war in neighbouring Syria and years of internal political disputes. The economy relies on the confidence of millions of expatriate Lebanese who deposit into local banks. The banks buy government debt, which finances the expanding budget deficit and debt. The International Monetary Fund last month strongly criticised Lebanon's unsustainable debt trajectory and said there was an "urgent need" for government policy to stabilise and then reduce public debt as a share of gross domestic product. Hoping to stimulate its economy, Lebanon this year is seeking up to $16bn in infrastructure investment from international donors who hope to ward off more Middle East instability, in a country that hosts more than a million Syrian refugees. "It is no secret that the economic situation in Lebanon today is difficult and that we face big challenges," Hariri told the conference. "Growth rates are low, unemployment rates have exceeded 30%, poverty rates are increasing, the balance of payments suffers a deficit, public debt is rising at a rapid rate and has exceeded $80bn and the treasury deficit has reached unsustainable levels," he added. Salameh told Reuters on the conference's sidelines that November's increase in local currency interest rates of around 2 percentage points – a result of the political crisis – had been enough to iron out market imbalances, "therefore we have an outlook of stable interest rates". The government passed a state budget last year for the first time since 2005 and has pledged to agree a 2018 budget before April 6, when France will host a donor conference to support Lebanon. Source: Reuters • Tunisia raises interest rate as inflation accelerates: Tunisia’s central bank raised its benchmark interest rate for the first time in almost a year as surging consumer prices and dwindling foreign reserves heap pressure on the North African nation’s struggling economy. Policy makers raised the rate by 75 basis points to 5.75%. The increase was the first under Governor Marouane El Abassi, who was appointed last month amid protests over an economy that has failed to recover since the Arab Spring in 2011. His predecessor had resigned before a parliamentary vote to remove him from the post he had held for about six years. The central bank said it raised borrowing costs “to face up to the real risks of ongoing inflation in 2018.” Consumer prices rose 7.1% from a year earlier as the currency weakens. Other indicators, including the potential increase of international commodity prices raise the prospect of more “inflationary pressures over the coming period,” it said. The bank last raised interest rates in May 2017. Political unrest, terrorist attacks and a dearth of foreign investment have stymied successive governments in Tunisia which is already grappling with high unemployment and the fallout from austerity measures. Foreign currency reserves have been steadily declining, and at 11.25 billion dinars ($4.67bn), now provide only 78 days of import cover, according to data posted on the bank’s website on Tuesday. Source: Bloomberg 6
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