Weekly Economic Commentary – October 10, 2010

10 October, 2010
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Central bank decisions influenced stock markets worldwide: US and European stocks fell on Mon after news of tighter banking capital rules imposed by Swiss policymakers; next, the unexpected intervention by the BoJ, led to a five-month high rally in world stocks; markets ended the week positively after weak US jobs data renewed hopes for more quantitative easing. Regional markets were mostly up on the previous week, with only Saudi down slightly (-0.4%). Dollar continued to weaken against major currencies (eg. new 15-year low against the yen); the weakness helped oil prices to rally while gold prices continued to hit new highs ($ 1364.8/oz).

Global Developments


  • Orders for U.S. capital goods rebounded in Aug – bookings for non-military capital goods ex. planes grew 5.1% yoy, the biggest gain since March. Weaker aircraft demand pulled down total bookings by -0.5% mom.
  • Pending sales of existing homes are up 4.3% mom, rising for a second month, indicating that home sales are steadying after plunging in the months following the expiration of a housing tax credit.
  • ISM index of non-manufacturing businesses rose to 53.2 in Sep (Aug: 51.5). ISM non-manufacturing employment gauge rose to 50.2 (48.2) while the measure of new orders increased to 54.9 (52.4).
  • Initial jobless claims dropped by 11k, the fewest since July 10, to 445k in the week ended Oct 2.
  • September non-farm payrolls reported a loss of 95k jobs – mostly from the government sector, as private sector payrolls showed a moderate increase (+64k jobs) while the unemployment rate held steady at 9.6%.


  • Eurozone producer-price inflation slowed to 3.6% yoy in Aug (Jul: 4%) as a stronger euro helped offset higher costs for energy.
  • September PMI showed that both services and manufacturing industries in Europe grew at the slowest pace in seven months (to 54.1 from 56.2 in Aug). Separately, Aug retail sales unexpectedly fell 0.4% mom.
  • German manufacturing orders rose by 3.4% mom in Aug, thanks to strong foreign demand while industry output also witnessed a sharp increase of 1.7% mom (Jul: 0.1%) pointing towards a robust industrial sector.
  • Fitch downgraded Ireland, from AA- to A+, with a negative outlook. Meanwhile, Irish consumer confidence fell sharply in Sep – down 9 points to 52.4.
  • The ECB kept policy rates unchanged at 1%, also signaling that it was unlikely to consider new measures to support the euro zone’s economy despite signs that the bloc’s recovery is slowing. The policy decision came a day after the Bank of England voted to keep bond purchases and its key interest rate unchanged.
  • The ECB has made changes to its legal framework to limit individual banks’ borrowing at ECB lending operations. “On the grounds of prudence, the Eurosystem may also reject assets, limit the use of assets or apply supplementary haircuts to assets submitted as collateral in Eurosystem credit operations by specific counterparties,” according to the new legal text.

Asia and Pacific:

  • In a week dominated by Asian central bank meetings, the surprise came from the Bank of Japan: BoJ unexpectedly reduced borrowing costs (to a range of 0-0.1%, the lowest level since 2006, from 0.1%) for the first time since 2008. Additionally, the BoJ announced a new facility of JPY 5trn, under which it will buy government debt and other assets, thereby expanding the balance sheet.
  • Both Indonesian and Philippines central banks kept policy rates unchanged at 6.5% and 4% respectively.

Bottom line:

The IMF has forecast world output growth at 4.8% yoy in 2010 – an unbalanced recovery, with emerging economies (7.1%) outpacing their advanced counterparts (2.7%). The main drivers of the recovery were identified as inventory accumulation and fiscal stimulus, with the latter currently being phased out. Weaknesses in the financial system were still constraining credit, and IMF recommendations included that governments must continue both financial repairs and financial reforms.

Regional Developments

  • Qatar Financial Centre Authority has enacted a corporate tax regime – 10% tax on corporate profits (applied only to money earned within Qatar), with some exemptions for insurance businesses and investment funds.
  • Bahrain’s Central Informatics Organization announced a 4.6% yoy growth in real terms in Q2 2010 (Q1: 1.4%), while total output at current prices registered a remarkable growth rate of 8.17%.
  • A recent survey on bank lending to SMEs in MENA found that only 8% of banks’ total loans were made to the small scale sector in the region, in comparison to 2% in the GCC and 14% in non-GCC countries.
  • Provisions made by Qatar’s banking industry in 2009 stood at a record high of QAR 13.75bn (roughly 4.65% of total customer deposits) and is also considered high by international banking standards.
  • Jordan’s request to sign a free trade agreement with Gulf states’ will be brought up and discussed by Saudi Arabia during the next meetings of the Gulf Cooperation Council.
  • The Nawras IPO (opened Sep 15) will set a major precedent for the launch of new issues based on the book-building route, a process of determining the price at which an IPO will be offered, as per Morgan Stanley.
  • The Islamic Development Bank has increased the ceiling of its Sukuk Trust Certificate Issuance program to USD 3.5bn from USD 1.5bn to facilitate new issuance of Sukuk.

UAE Focus

  • Dubai direct trade exchange with the world grew by 17.2% yoy during the first seven months of 2010 reaching AED 328bn (2009: AED 279bn). India topped the list of Dubai direct trade partners, with a total value of over AED 85bn of trade transactions constituting 26% of the aggregate Dubai trade rate with the outside world.
  • The board of directors of the Central Bank of the UAE discussed a memorandum on introducing the Macro Prudential Regulation in the country to ensure ‘the stability of the financial system’, without giving much detail on what it plans to introduce and when it will come into force.
  • UAE Central bank reserves are estimated at USD 33bn until June of this year, with the dollar accounting for 98% of foreign exchange reserves and no euros.
  • UAE non-oil trade grew 8% yoy to AED 412bn in the first seven months of 2010. Exports saw a growth of 31% during the same period and there was also a rise in the number of items imported.
  • Mubadala has signed two agreements on a strategic partnership with 1Malaysia Development Berhad (a Malaysian Government undertaking) that could lead to an investment of up to AED 25bn for the development of a major initiative in the country.
  • Emaar announced that the final offering size of its convertible bond issue will be USD 500mn after the company exercised an over-allotment option.

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