Weekly Economic Review – Week ending April 23, 2016

 

Current Week Previous Week Change Current Week Previous Week Change
DFM 3583.82 3546.96 1.04% USD/INR 66.48 66.65 -0.26%
ADSM 4636.75 4534.88 2.25% EUR/USD 1.1222 1.1284 -0.55%
SENSEX 25838.14 25626.75 0.82% USD/JPY 111.79 108.76 2.79%
NIFTY 7899.30 7850.45 0.62% USD/CNY 6.4995 6.4755 0.37%
DOW 18003.75 17897.46 0.59% Gold 1233.03 1233.99 -0.08%
NASDAQ 4906.20 4938.22 -0.65% US 10 yr 1.89 1.75 8.00%
S&P 500 2091.58 2080.73 0.52% Brent 45.11 43.10 4.66%

Dubai’s diversification into aviation and tourism through its well-connected Dubai International Airport continues to provide results.  In February, passenger traffic increased by 6.9% (Year-on-Year) to 6.38 million.  For the first two months of 2016 the total passenger traffic was at 13.7 million which is up 6.5% for the same period in 2015. In terms of destination, India remained the top destination and pulled further ahead from the others with 885,298 passengers. The second & third slots were taken by Saudi Arabia with 485,570 passengers and United Kingdom with 460,279 passengers.  In line with passenger traffic growth aircraft movement increased by 6.3% to 32,975 during February.  The benefits of this passenger traffic accrues to the tourism and retail sector, which are holding up inspite of the large slowdown across the region due to lower crude oil prices.

As per the Credit Sentiment Survey released by UAE Central Bank, demand for credit rebounded, both for personal & business credit in the first quarter of 2016.  Though there was a pick-up in demand for credit from corporates and small businesses, there was reduced willingness to extend business loans by financial institutions. This is typical phenomenon in economic cycles as banks tend to be extremely cautious in lending during downturns and are a bit laxer during boom times.   On the retail side, demand from individuals also posted some increase, reflecting some bounce back in sentiment after a dip in demand in Q4 of 2015.

As per a report in Bloomberg, the emirate of Abu Dhabi is considering a bond offering for the first time in after April 2009.  The issue could be launched towards end of April or early May with meetings with investors in the coming week.  Abu Dhabi is rated at AA which is the third highest possible rating, has vast amount of external reserves & has one of the strongest financial positions amongst all Middle East issuers. This issue could see tremendous demand from investors who are hungry for yield from high quality issuers and also due to scarcity of Abu Dhabi paper in the market.  About 90% of revenues of Abu Dhabi is derived from crude oil and also about 50% of its GDP.

As per a report from fDi Intelligence, a part of Financial Times data division, India was the top destination for FDI in greenfield investment projects.  India was the highest ranked country in this category with $63 billion of FDI announced in 2015. This constituted 21% of all greenfield investment projects in the Asia-Pacific region last year.  This is a good indicator of growth in the coming quarters as these projects gather pace and trend towards completion. The impact of this increased flow is being felt in FX reserves which hit an all-time high of $360.25 billion as per data from RBI, for the fourth time in 2016.

Wholesale prices remained in negative territory for the 15th consecutive month with WPI for March at -0.85% (year-on-year).  Power & fuel which account for 14.91% of the Index were down by 8.30% which was the key on why this Index remained in negative territory.  The drag from lower metal prices resulted in several of the sub-components like basic metals alloy & metal products, iron, chemicals, rubber & plastic all remaining in negative territory.  Food articles and products which have a combined weightage of about 28% were the key drivers of inflation higher.  The manufacturing sector is showing signs of growth but pricing power at the factory gate does not seem to increasing due to a collapse in commodity prices and low global demand.

India’s trade deficit slumped to $5 billion which is the lowest it has been in nearly 5 years in March.  While the shirking in the trade deficit is welcome, the reasons for it to fall are not welcome for the economy.  Exports in March at $22.7 billion were lower than March 2015 by 5.47%. The prime reason for shrinking in exports is due to a fall of 21.4% in export of petroleum products, non-petroleum exports were lower by 3.5%.   Imports fell by 21.6%, a chunk of this fall can be accounted by a drop in gold imports by $4.012 billion, which was down by 80.48% from the March 2015 number due to the strike by Jewelers who opposed the excise duty imposed by the government.  Oil imports also fell steeply by $2.619 billon (35.3%).  The improvement in the trade deficit could be temporary as gold imports pick up again and the increase in petroleum prices in recent weeks could also impact.

Silver prices have crept higher over the last few weeks after trading a low of $14.78 an ounce on April 1.  On the technical charts it has moved above its 200-moving average around the $15 an ounce level and is poised to probe higher levels.  Silver which unlike Gold, also has significant industrial demand, with sectors like the solar power industry which is growing rapidly poised to consume more silver as globally there is significant amount of government push towards renewable energy sources.  Silver, like gold is also a “safe haven” asset and has lagged Gold prices in 2016 and is playing catch up at a rapid pace in April, one reason for this could be that silver implied lease rates are negative whereas gold lease rates are positive yielding a positive yield in a world where about $9 trillion of sovereign bonds are trading at a negative yield.  Speculative interest in silver has also increased through this year with net long positions increasing to over 70k contracts after bottoming out at around 8k contracts in July last year as per data from CFTC.  Outstanding long contracts on Friday at 71.4k is the highest it has been since the financial crisis. Silver prices have had some very large moves on both sides and momentum plays a large role in this and in the current scenario momentum does seem to be building for a levels further higher.

Equity prices which staged a spectacular rebound after the sharp fall in January, were slightly soft this week, with the tech heavy Nasdaq posting losses & Dow Jones & S&P 500 eking out some gains. The tech sector was impacted with weaker than expected results from market leaders Alphabet & Microsoft. Apple was slightly lower due to cuts by analysts of IPhone sales. We could have possibly seen the highest level of 2016 traded over the last few weeks.  The US economy has certainly hit a soft patch with housing, retail sales, capital goods orders all easing; with only job creation continuing to be strong. GDP estimate for Q1 is as low as 0.3% & the US economy has hit a soft patch.  Bank earnings have been lower than expected and, net revenues have help up as this has been achieved by large scale cost cuts, not by increasing revenues. Hedge funds suffered the biggest withdrawals since the financial crisis as per a report from Hedge Fund Research Inc.  As per this report in Q1 outflows from hedge funds amounted to $15.1 billion which is the largest quarterly outflow since Q2 2009, but also the first consecutive quarters of outflows since 2009.  The large volatility with sell-offs and rallies in Q1 in stocks and commodities resulted in losses in several hedge funds.  The tech sector was impacted with weaker than expected results from market leaders Alphabet & Microsoft.

Crude Oil prices headed lower on Friday as Saudi Arabian Deputy Crown Prince Mohammed bin Salman, mentioned that Saudi will freeze oil output only if Iran and other major producers agree to curb theirs. This puts the whole premise of the output freeze championed by Russia & some of the OPEC members like Venezuela on the backburner and it does the same to the rally in crude oil prices we have witnessed over the last few weeks. Iran has certainly ruled out a cut in output and it does seem impractical for Iran to agree to an output freeze as it is coming out from the sanctions regime, producing about 2.8 million barrels a day which is way below its pre-sanctions level of 4.5 million barrels a day and way below the 7 million barrels it produced before the Islamic revolution in 1979!!! Iran after being under the sanction regime for a long time can cope with this low price and is keen to maintain and build on its market share. Crude oil inventories as per data from US Energy Information Administration (EIA) is at 534.8 million barrels after adding 2.3 million barrels more this week. This is a historically high level for this time of the year for crude oil inventories in the US. The globe is awash with excess crude oil and with no signs of a production cut from OPEC, we could see crude oil prices retrace some of the gains posted last month.

US economic data was softer than expected again this week, the housing sector data was mixed with the forward looking starts number dipping lower and existing home sales increasing. Housing starts fell sharply lower by 8.8% to an annual pace of 1.089 million in March.  Building permits were also weaker down by 7.7% in March which was also below the lowest of economist’s consensus. Existing home sales increased by 5.1% in March to an annualized rate of 5.330 million.  This does not however reverse the large drop in February, though for the whole of the first quarter existing home sales are up 4.8%.  Philadelphia Fed’s Manufacturing Index slumped back into contraction territory falling to -0.6 in April.  Another indicator of the manufacturing sector; PMI also came in below expectations at 50.8 for April. Weakness in the energy sector and contraction in export orders were the reasons for this drop from March.

There was quite a bit of “Fed Talk” this week.  FOMC Vice-Chairman & NY Fed President William Dudley sounded cautious when he mentioned “US economic environment is “mostly favorable” but the Fed remains cautious in hiking interest rates as threats loom.”  He also reiterated that the Fed should take a gradual and cautious approach to monetary policy tightening amid significant uncertainties and headwinds to growth stemming from the financial crisis, which have not fully abated.   FOMC voting member and Boston Fed President Eric Rosengren was a bit more “hawkish” stating that the markets “While I believe that gradual … rate increases are absolutely appropriate, I do not see that the risks are so elevated, nor the outlook so pessimistic, as to justify the exceptionally shallow interest rate path currently reflected in financial futures markets,”

Disclaimer: This is not a research report of Quantum Auditing. These reviews should not be taken to constitute advice or recommendation. Quantum Auditing does not claim it to be accurate nor accept any responsibility for the same.

Source of information: Bloomberg.com, Investing.com

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