Weekly Economic Commentary – January 16, 2011

Markets

Global equity markets closed on a positive note – US boosted by strong Q4 earnings results (JP Morgan); European stocks were lifted after Portugal’s successful debt auction and optimism about upcoming bond sales; Asia advanced on banking and property stocks amid inflationary fears putting the brakes on India’s Sensex, which recorded the worst weekly performance in 8 months. Saudi and Qatar continued their bull runs among regional markets. Euro moved from a 4-month low against the dollar on bond auctions while oil rose above $99 per barrel on Fri though failing to touch $100. Food prices continued to soar, but are below the highs of Mar ‘08.

Global Developments

Americas:

• Retail sales in Dec rose for the sixth consecutive month by 0.6% mom (Nov: 0.8%), driven by demand during the holiday season, also recording the biggest one-year gain (6.7%) since 1999.
• Industrial production increased by 0.8% mom in Dec, rising the most in five months, boosted by gains in business equipment and home electronics, after a revised 0.3% growth in Nov.
• Trade deficit unexpectedly narrowed by 0.3% to $38.3 bn in Nov (Oct: $38.4) helped by the weaker dollar. Trade gap with China widened: $252.4 bn over Jan-Nov‘10, compared to 2008’s record gap of $268.0 bn.
• Initial jobless claims for the week ending Jan 8, 2011 rose by 35k to 445k – the highest since last Oct.
• US cost of living increased 0.5% mom in Dec, led by higher fuel and food prices, while the core price index, which excludes volatile food and fuel costs, rose 0.1%.

Europe:

• The Swiss national bank has stopped accepting Irish and Portuguese paper as collateral for “repo” agreements with commercial banks.
• Eurozone industrial production rose 1.2% mom in Nov (Oct: 0.7%), led by output of intermediate goods (1.6%) such as car engines and steel.
• German GDP grew 3.6% in 2010 as per initial estimates (2009: -4.7%), at its fastest pace since the reunification in 1992, on a rebound in exports and consumer spending.
• Inflation in the Eurozone was up by 2.2% in Dec, accelerating at the fastest pace in more than two years and above ECB’s target, led by surging energy costs.
• The recent ECB monetary policy announcement left the benchmark interest rate unchanged at 1.00% adopting a more hawkish stance than usual and warning about rising inflationary pressure.

Asia and Pacific:

• China reported a USD 13.1 bn trade surplus in Dec 2010, taking the full year trade surplus to USD 183.1bn (exports: 31.3% to USD 1.58 trn; imports: 38.7% to USD 1.39 trn).
• China’s foreign-exchange reserves rose 18.7% yoy to a record USD 2.85 trillion in 2010, also recording the biggest ever quarterly gain of USD 199 bn in Q4 2010.
• China raised reserve requirements by a further 50bps (effective Jan 20) to rein in liquidity after news was released about new loans exceeding CNY 500 bn in the first seven days of the new year.
• India’s industrial production grew at the slowest pace in 18 months by 2.7% yoy in November.
• South Korea’s central bank raised rates another 25bps to 2.75% and announced a set of new measures to regulate equity derivatives trading in its efforts to reduce market volatility.
• Japan’s core machinery orders fell for the third consecutive month in Nov, down 3% mom.

Bottom line:

Positive news from the Eurozone last week: promises of financial support for EFSF bonds from China and Japan along with the successful bond auctions from Portugal, Italy and Spain has restored some optimism. However, inflationary concerns (through commodity prices) continue to haunt emerging markets with China and South Korea both hiking policy rates last week .

Regional Developments

• The GCC customs union disclosed the total collected custom duties in 2010 reached USD 6 bn with the distribution quotas – BH:3.15%, QA: 7.8%, OM: 9.52%, KW: 10.92%, UAE: 25.75% and KSA: 42.77%.
• A recent EIU report mentions that the Saudi Arabia’s Capital Market Authority (CMA) is getting close to making a decision to open up the kingdom’s stock market to direct trading by overseas investors. The Head of CMA and Tadawul has however refuted the statement.
• Saudi Arabia entered the list of the least risky sovereigns at 10th place, in a list topped by Norway, Finland and Sweden, according to the CMA Datavision.
• Saudi non-oil exports rose by 12% yoy in Nov’10 to SAR 10.85bn while imports were up 4% to SAR 28.44bn.
• World Bank announced that the MENA region is expected to grow at 4.3% this year, after witnessing a modest upturn in growth of around 3.3% in 2010 on higher oil prices and “revival in exports, remittances and tourism”.
• Oman’s 7th five-year plan (2006-10) reported an increase in the volume of investments to OMR 14.1 bn, up 110% compared to the planned investment in the 6th Plan.
• The Saudi government announces to stop issuing tourism visas and quoted this action for country advantage. (Source:Aleqt)
• GCC Aluminum Council disclosed the GCC Aluminum productions represents 4% of world output with $30 bn investment and expected to reach 10% and $ 55 bn investment by 2020 after new expansions.
• The Doha Securities Market will extend the trading hours to take place between 06:30 GMT & 10:00 GMT.
• Qatar enters the renewable energy market with SOLMATEQ, a solar energy company.
• Saudi Arabia is developing water projects worth $149 mn in the country and the Empty Quarter area.
• Vodafone Qatar disclosed the overall telecommunication services subscriptions crossed 700k on Jan 10, 2011.
• The Egypt Stock Exchange received EGP 8.4 billion FDI inflow recording 68% increase in 2010.

UAE Focus

• The Dubai Government budget for 2011 – estimating AED 29.9 bn revenue, AED 33.6 bn expenditure, AED 3.77 bn fiscal deficit (3% of GDP), capital & current at 43% & 57% – was approved by the Ruler of Dubai.
• Dubai’s five-year credit default swaps readings have dropped around 100bp to reach 406bp which is the pre-level of Dubai Holding shocks.
• Abu Dhabi inflation rate clocked in at 3% yoy in 2010 while decreasing 0.79% mom in Dec 2010.
• Dubai Dry Docks announced restructuring debt partially without any assets liquidation.
• Sharjah ports handled 300 million containers recording 10% increase in 2010.
• HSBC Nasdaq Dubai UAE Sukuk dollar index climbed to 131.5 – the highest level since its 2005 launch. This gain was as a result of the debt restructuring talks ongoing in the emirate and bodes well for the Sukuk market.
• Dubai export, re-export and import for first 2010 ten months were recorded at AED 56.5 bn, AED 118 bn and AED 300 bn respectively, recording growths of 36%, 23%, 14% yoy.
• Abu Dhabi Department of finance and Mubadala bailed out Aldar real estate company by AED 2.8 billion.
• RERA has launched a joint easing program with six banks in Dubai to improve real estate mortgage loans.
• Zabeel Investments, a holding company, is in talks with creditors to restructure $1.63 bn in debt – discussing extending debt maturities, as well as asset sales and a potential injection of capital. Source: The National.