Weekly Economic Commentary – February 2, 2014

Markets

Stock markets had another bad week with wild oscillations that underline the lack of a catalyst underpinning the rosy valuations and earnings forecasts. Stocks in the US, UK, Europe and Japan all fell in January, a simultaneous beginning-of-the-year drop not recorded since 2010, at the peak of the eurozone debt crisis (several national European stocks indices recorded the worst month since last June). Also Chinese shares sank before the New Year taking with them most of Asian markets. The further step in tapering by the Fed and heightened tensions in emerging markets did not help (investors pulled funds out of the developing world at the fastest rate since 2011) nor did the rate increases by a spate of emerging market central banks. Regional markets were mixed, but overall quite resilient apart from Qatar. Overall a broader retreat from risky assets led to a jump in demand for safe havens like Treasuries, although gold did not benefit. Among currencies the euro suffered a notable slide along with emerging markets currencies that continued their slide. Oil prices on the other hand remained remarkably stable.

Global Developments

US/Americas:

• US GDP grew 3.2% qoq ann in Q4 in line with expectations, but below the Q3 pace of 4.1% (when inventory grew substantially). Private consumption increased 3.3% from 2% in Q3. For the whole of 2013 the growth rate was 1.9%.
• The US Fed lowered its monthly QE program by another USD 10bn to USD65bn (USD 35bn Treasuries and USD 30bn mortgage-backed securities). The move (voted unanimously) signals that the central bank remains comfortable with the pace of the recovery.
• US durable goods orders tumbled -4.3% mom in Dec vs forecast of 1.8% increase. Excluding aircrafts orders fell 1.6%. Total shipments dropped -1.9%, while inventories grew 0.8%. Other elements were negative; core capital orders declined -1.3%, while shipments fell -0.2%.
• US new homes sales collapsed -7% in Dec to an annualised rate of 414,000, versus a forecast drop of -2%, the second straight month of declines in sales after October’s walloping 14.9% increase. New home sales were up 4.5% yoy and in 2013 a total of 428,000 single family homes were sold. That was the most since 2008 and represented a 16.4% increase from 2012.
• US Personal income was flat in Dec after rising 0.2% mom in Nov due to lackluster wage income. Proprietors’ income fell while transfer income grew marginally. Nominal consumer spending rose 0.4% mom after rising 0.6% in Nov.
• The median price of US new homes increased 4.6% yoy. New home prices rose 8.4 percent in 2013, the largest increase since 2005. In 2013, the median new home price was $265,800, the highest on record.
• The Case Shiller index of 10-city existing US home price was up 13.8% yoy compared with the 13.6% originally reported last month. The 20-city composite is also up 13.7% over the same period, above the 13.6% reported last month. On a non seasonally adjusted basis, both the 10-city and 20-city fell  -0.1% mom.
• The Conference Board US consumer confidence index climbed to 80.7 in Jan, up from 78 in Dec beating the expectation of 78.1.
• US initial jobless claims unexpectedly increased by 19,000 to 248,000 sa. The four-week moving average rose by 750 to 333,000. Continuing claims fell 16,000 to 2.9 million.
• Venezuela’s inflation rate ended 2013 at 52.7% (vs 19.5% in 2012) the highest level since 1996, exacerbated by shortages for basic goods and spiraling import prices.

Europe:

• M3 growth in the euro zone slowed again in Dec to 1% yoy sa, vs 1.5% in Nov, pulled down by marketable instruments and loans.
• Euro zone credit conditions stabilized in Q4 when the net percentage of banks reporting tighter conditions for firms fell to 2% from 5% in Q4. The demand for loans declined, albeit at a slower pace, with the stock of loans to nonfinancial corporations down -5.7% yoy in Nov.
• The German Ifo business confidence index increased to 110.6 from 109.5 in Dec.
• The Conference Board leading economic index for the euro zone rose to 109.9 in Dec from a revised 109.2 in the previous month. Meanwhile, the corresponding economic index, which measures current economic activity, fell 0.1% in Dec.
• Economic sentiment in the euro area crawled up by 0.5 points to 100.9 in Jan from a month ago, the 9th consecutive monthly advance.
• Eurozone business climate index in the euro area was virtually unchanged at 0.19 in Jan, compared with 0.2 in Dec.
• UK’s GDP growth moderated in Q3 to 0.7% qoq, The annual growth rate in 2013 was the strongest since 2007.
• To support the lira the Turkish central bank raised the weekly repo rate from 4.5% to 10% and lifted the top rate from 7.75% to 12%. But the effective rate on interbank market was already above 7% before the rise, so the true increase was modest after all.
• The Russian central bank pledged unlimited foreign exchange intervention to keep the Ruble inside its trading band.
• South African Reserve Bank unexpectedly raised the repo rate by 0.5% to 5.5%, the first rate change since 0.5% cut 18 months ago.

Asia and Pacific:

• The HSBC/Markit China manufacturing PMI fell to 49.5 in Jan from 50.5 in Dec, recording its first deterioration since Jun.  Separately, China’s Official manufacturing PMI fell for the second month to 50.5 dragged by new orders and output.
• The Chinese authorities bailed out a USD 500m trust backed by loans to a bankrupt mining company. The move was criticized by rating agencies that saw a wasted occasion to take care of rising moral hazard in the shadow banking sector.
• Japan core CPI increased by a more-than-expected 1.3% yoy in Dec, marking a new five-year high following Nov’s 1.2% yoy gain.
• Japan Industrial production grew 1.1% mom in Dec, slightly missing expectations, but rebounding from a -0.1% decline in Nov.
• India Central Bank raised its key rate by 0.25% to 8.0% in an attempt to prop up the rupee.
• Philippines GDP expanded 6.5% in Q4, slightly slower than 6.9% in Q3. In 2013 GDP rose 7.2% after 6.8% in 2012, the strongest two year performance since the 1950s.

Bottom line: The US GDP and some encouraging data from the euro area confirm a degree of stabilization in developed economies. However China’s woes remain a sore point and the debt problem within China’s shadow banking system this year is likely to become more important than the Fed moves. Central banks in countries at risk of a balance of payments crisis have taken drastic measures to support their currencies but in the absence of a more determined effort on structural reforms they will merely buy time. Markets are starting to realize that central banks, both in developed and emerging markets, surrendering to the myopic desires of politicians are not able to put the genie back into the jar.

Regional Developments

• Bahrain’s Deputy PM revealed that the country was launching housing and power projects worth nearly USD 4.43bn (with housing accounting for 49% of projects) – the financing is part of the USD 10bn aid package approved three years back by the Gulf nations.
• Egypt President Adly Mansour announced that presidential elections will be held before parliamentary polls – an amendment to transitional roadmap. Mansour’s decision came after carrying out several dialogues with political groups, which saw a majority in favor of holding presidential elections first. Mansour asked Supreme Electoral Committee (SEC) to open the door for candidates in accordance with new constitution articles. Procedures for presidential polls should begin in no less than 30 days and no more than 90 days following successful implementation of country’s new constitution – according to a decree issued by Mansour. Since, new constitution was put into effect on 18th January 2014; accordingly presidential polls should take place between 17th February and 18th April 2014.
• Money supply in Egypt climbed 19.1% to EGP 1.39 trillion in the year up to Dec while the central bank governor stated that foreign reserves are at “around USD 17 billion” and will not be lower than that by the end of Jan (Dec: USD 17.032bn).
• Reports citing an unnamed ministerial source revealed that Saudi Arabia is likely to provide Egypt additional funds of up to USD 4bn in central bank deposits and petroleum products; this agreement is expected to happen during the PM visit to Saudi Arabia this week.
• Iraq’s crude oil exports declined to an average 2.228mn barrels per day in Jan (Dec: 2.341mn bpd), as per the Oil Minister, due to attacks on a pipeline and bad weather, but is expected to rise in Feb.
• The central bank chief in Iraq revealed that the country’s domestic bond issuance has been delayed to 2015, citing legal difficulties arranging the issue (without further explanations).
• Iraq plans to establish a state-funded investment bank to help finance big infrastructure projects, revealed a senior government official. Named the “Investment and Development Bank of Iraq”, it is expected to receive 1% of annual state budget allocations over seven years under a proposal that is to be sent to parliament for approval.
• Public debt in Jordan increased 15% at the end of Nov 2013 to JOD 19.65bn, about 79.5% of the estimated GDP in 2013, from JOD 16.58bn at the end of 2012.
• Kuwait’s cabinet approved the 2014/15 draft budget (spending estimated at KWD 21.86bn) last week; it still needs to be approved by the parliament.
• Real estate sales in Kuwait increased 10% yoy to KWD 399mn in Dec, according to estimates from the National Bank of Kuwait. Monthly sales averaged KWD 308mn in 2013, and total sales grew 18% yoy.
• Lebanon’s trade deficit widened by 2.525% to USD 17.292bn in 2013, as exports fell by more than USD 480mn, reported the Customs department. China was the leading source of goods imported into Lebanon, followed by Italy, France, US and Germany while Syria was the leading importer of Lebanese-made goods, followed by Saudi Arabia and the UAE.
• Oman is planning to change the initial public offering (IPO) requirements for all upcoming power generation and related water projects: it will be required to float at least 40% of their share capital to list on the Muscat Securities Market – compared to the 35% listing requirement currently.
• Oman’s National Center for Statistics and Information reported that the traded value of property rose 21.5% to OMR 1.95bn by the end of Nov 2013. Mortgage contracts, which grew 18% yoy to OMR 1.29bn, comprised 66.2% of the total value of property trade during this period.
• Qatar Central Bank data showed that assets and liabilities of banks increased by QAR 13.1bn (mom) to QAR 915.9bn in Dec 2013; real estate loans increased to QAR 85.4bn. Gross credit exposures to real estate increased across the banks: the exposure of Al Khaliji had the maximum growth of about three-fold to QAR 3.47bn, Doha Bank surged 37% to QAR 9.41bn, Qatar National Bank by 25% to QAR 32.97bn, Ahli bank by 21% to QAR 3.47bn and Qatar Islamic Bank by 6% to QAR 14.76bn.
• A report from the Gulf Investment Corporation showed that both Qatar and Kuwait central banks were holding significant gold reserves, consistently rising since 2008, and with gold stocks in Qatar almost three-fold of the gold stock in Kuwait. The report also stated that total assets of the GCC central banks grew by 62% to USD 901bn in Sep 2013 from USD 557bn in 2008.
• Saudi nationals invested about AED 4.6bn in Dubai’s real estate during 2013, according to the Dubai Land Department. (Refer to the UAE section for further details)
• Infrastructure projects in Saudi Arabia is expected to create 2mn direct jobs and a further 2.5mn indirect jobs, reported local media quoting a regional report. The report also stated that 43% of Saudi graduates are jobless, while the rates were 22% and 14% in Morocco and UAE respectively.
• About 38.27% of government jobs are occupied by Saudi women, as per a report issued by the Human Resources Planning and Development Department of the Ministry of Civil Services. Around 10,690 women were employed in the educational sector while 5,675 were employed in various other sectors.

UAE Focus

• The IMF raised UAE’s 2014 growth forecast to 4.5%, but cautioned that “if not implemented prudently, these [mega]projects could exacerbate the risk of a real estate bubble”, also pointing towards the “additional financial risks for Dubai’s GREs and the banking system in light of the still considerable debt overhang from the 2009 crisis”. Meanwhile, rumours doing the rounds are that Dubai has reached an agreement with Abu Dhabi on the USD 20bn of debt, with a view that “it may be turned into a supporting vehicle for Dubai”.
• DFM issued rules allowing the lending and borrowing of securities, ahead of the influx of foreign funds later this year. In the “initial phase”, securities lending and borrowing will only be for market-making and settling securities deliveries that have failed, said DFM.
• The amount of international real estate transactions in Dubai exceeded AED 114bn, nearly half of the AED 236bn total in 2013, as per Dubai Land Department statistics. Indians (AED 18bn), British (AED 10.4bn) and Pakistani (AED 8.6bn) nationals were the largest international investors while GCC nations contributed AED 33bn from 7,548 investors (UAE: AED 24bn, KSA: 4.6bn). Meanwhile, brokers in Dubai made more than AED 1.8bn in commissions last year.
• Annual passenger traffic at Dubai airport grew 15.2% yoy to 66.4mn passengers in 2013, thanks to a record-breaking 6mn+ passengers in Dec. India retained its position as Dubai’s largest destination country with 8,401,253 passengers (14.3% yoy).
• Hotel occupancy in Dubai grew by 2.9% yoy to touch 76.3% in Dec, according to data from STR Global. The average daily rate in UAE touched AED 862.59 (+4.9%) with revenue per available room at AED 657.88 (+7.8%).
• Dubai Mall recorded a 15% rise in visitors in 2013 to 75mn, according to Emaar, overtaking Mall of America and Bullring Birmingham (with 40 million visitors each). Average monthly footfall was 6.25mn.