Weekly Economic Commentary – June 06, 2010

Markets

Stock markets continue to accumulate losses due to the fiscal crisis in Europe and a general reassessment of the prospects for 2011 which are looking bleaker compared to 2010. Regional markets were mostly down with the exception of Morocco due to Greece’s situation and renewed sharp drops. The euro dropped to a four-year low against the dollar as worries that European banks could still face large loan losses next year. Oil price falls amid Wall Street while raised in DME and gold prices rose also.

Global Developments

Americas:

  • US pending home sales grew 6.0% mom in April from a revised +7.1% in March while construction spending surprisingly increased +2.7% mom in April, outpacing March’s 0.4% rise.
  • US initial jobless claims declined to 453k from the previous week’s revised figure of 463k. US non-farm payrolls rose 431k in May, a figure that was dominated by temporary hiring for the US Census.
  • The Bank of Canada became the first G7 central bank to hike rates in the current cycle, by 25bp, to 0.5%.

Europe:

  • The ECB disclosed that it has piled up €35 billion of public debt in the past 3 weeks and revised up its estimate of bank loan losses for 2010 by €10 billion, to €135 billion. In 2011 it expects a further €105 billion of losses.
  • The Euroarea unemployment rate rose to 10.1%, despite a decline in the German rate to 7.7%, down 5 ticks in the past 6 months.
  • Euroarea manufacturing PMI final reading confirmed a fall from 57.6 to 55.8 (a unit lower than the flash).
  • Eurozone GDP rose in the first quarter of 2010 by 0.2% qoq, a welcome rise from prior quarter’s 0.1% qoq.
  • Russia’s central bank cuts rates by 25bp, to 7.75%.

Asia and Pacific:

  • China’s two PMIs (the official and private sector index) showed roughly the same profile in May: the official slipped from 55.7 to 53.9, while the HSBC-sponsored one fell from 55.2 to 52.7.
  • Japan’s Prime Minister resigned after a few months in office in the wake of the discontent over the renewal of the Okinawa US base and widespread criticism over economic policy.

Bottom line:

The current data flow highlights that the situation in the periphery of Europe is at a difficult juncture, but also other major economies are starting to show some “recovery fatigue”. Even China, where the authorities have signaled a need to address the housing bubble and to restrict access to credit, is feeling the effects of monetary tightening. International tensions due to Israel attack on peace activists and the skepticism of the US over the Iran Turkey Brazil deal on the nuclear program might intensify.

Regional Developments

  • Legislative framework for setting up the regional central bank, launch of the single currency, principles and mechanism to select the executive president of the bank were issues discussed at the latest meeting of the governors of the region’s central banks and members of the board of directors of the GCC Monetary Council.
  • Demand from the EU for removal of GCC customs duties on EU exports is the reason why the EU-GCC FTA has failed to materialize till now, according to the Director of International Economic Relations in the GCC.
  • Saudi Arabia and Bahrain are expected to approve later this year the route of a new oil pipeline (which will have a capacity of 350,000 barrels a day) between the countries, costing $350 mn.

UAE Focus

  • Dubai Holding Commercial Operations Group posted a net loss of $6.2 bn in 2009 which is estimated to be equivalent to 20% of its total assets.
  • Abu Dhabi Industrial and Commercial Bank of China are willing to provide financing, export credit and advisory services for the UAE railway signaling a leap in economic partnership between the two countries.
  • The Abu Dhabi Government’s investment arm Invest AD will launch a private equity fund with its Hong Kong partner to invest in the Middle East. It will close subscriptions for a separate Middle East stock fund in June.
  • Moody’s downgraded local and foreign currency deposits of Commercial Bank of Dubai to A3/Prime-2.
  • Tabreed is planning a $1.1 bn debt issue after it delayed payments on an Islamic bond last week.

 

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