Emirates NBD Research€¦ · positive economic news and improving optimism among investors. Rates...
Transcript of Emirates NBD Research€¦ · positive economic news and improving optimism among investors. Rates...
Monthly Insights
Tim Fox Khatija Haque Nick Stadtmiller Aditya Pugalia Irfan Ellam
Chief Economist GCC Economist Fixed Income Analyst Research Analyst Equity Analyst
+971.4.230 7800 +971.4.230 7801 +971.4.230 7804 +971.4.230 7802 +971.4.230 7807
Sharp swings between risk aversion and risk appetite have characterised conditions in most
financial markets over the past month, as illustrated by the movement of the VIX volatility index
shown in the chart below. Currently we are at the risk-loving end of the range but the situation
can change very quickly. Recent global data has provided encouragement to our more
optimistic expectations for regional growth this year, but the outlook for 2012 remains heavily
conditional on the external environment which itself is largely dependent on developments in
Europe.
Global Macro: Instead of looking at an improving economic landscape in H2 11, the picture has
been transformed to one in which we will now be lucky if the world avoids another recession. The
global economy is clearly skating on very thin ice, with the IMF, Federal Reserve and G20 all
saying as much recently. So where did it all go wrong, and where do we go from here?
GCC Macro: The GCC has been relatively resilient in the face of the deterioration in the global
economic environment over the last couple of months. Oil production continues to underpin GDP
growth, and relatively high oil prices have allowed governments to continue with ambitious
spending plans.
Fixed Income: Dollar interest rates have risen considerably in the past two weeks, reflecting
positive economic news and improving optimism among investors. Rates are highly correlated to
risk measures, and conditions in funding markets have not eased. Liquidity has tightened
somewhat in the UAE, but strains in global conditions are unlikely to impact local markets to the
extent they did in 2008.
Currencies: Although the USD strengthened against most currencies since our last edition, the
last few days have seen it give back many of these gains especially against major currencies. Our
view remains that these currency rallies reflect short covering from oversold positions and that
USD strength will eventually resume.
Equities: Globally sentiment has improved towards the end of last month and continued into
October as Eurozone policy makers started showing not only recognition but also an increasing
willingness to tackle the issues facing Europe with action, with the MSCI World Index +3.6% 1m
and VIX SPX falling -15.3% 1m to 36. Developed markets outperformed EM, with the MSCI G7
index +3.3% 1m vs -4.3% 1m for the MSCI EM index. The STOXX Europe 600 index was +8.2%
1m driven by improving sentiment.
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VIX index - The barometer of risk aversion
Source : Bloomberg
G L O B AL M AR K E TS AN D TR E AS U R Y f r o m
13 October 2011
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Global Macro Tim Fox
Back in July the sense was almost tangible that the world economy was slowly recovering from
the impact of the Japanese earthquake on global supply chains, and from the effect of rising
commodity prices, with oil prices starting to come off their Q2 2011 peak. Most encouragingly it
appeared that the US economy was finally beginning to turn a corner and pick-up some
momentum, with monthly jobs growth averaging 131,000 in the first six months of the year.
Markets were also hopeful that a default in the Eurozone had finally been averted, with a second
bailout for Greece having just been arranged.
Since the summer, however, it has quickly become apparent that all was not as it seemed. Global
activity indicators drifted lower, not just in the developed world but in China and in other emerging
market economies too, and US employment growth almost ground to a complete halt. The OECD
composite leading indicator fell to 100.8 in August from 101.4 in July. The financial markets skirted with
a US default, and having only just survived this, the United States was still unable to avoid a downgrade
to its AAA sovereign credit rating. Most critically of course, the carefully crafted second bailout arranged
for Greece in July began to unravel, even before most national parliaments had even had a chance to
vote on it.
Instead of looking at an improving economic landscape in H2 11, the picture has been transformed to
one in which we will now be lucky if the world avoids another recession. The global economy is clearly
skating on very thin ice, with the IMF, Federal Reserve and the G20 all saying as much recently. So
where did it all go wrong, and where do we go from here?
The starting point is that by the
middle of this year the world
economy was still only partially on
the road to recovery, three years
on from the financial crisis of
2008. Expectations and hopes
were improving but the hard
evidence of it was still very
tentative, which is not really
surprising given the still
considerable levels of
indebtedness prevailing,
particularly in the developed
world. Deleveraging had begun, particularly in the corporate sector, but much still remained to be done.
In hindsight perhaps expectations were simply too high.
The US economy was advancing slowly (growth of just 1.3% was finally recorded in Q2 after 0.4% in
Q1), but what it could least afford was the eruption of a political stand-off in Washington over the
extension of the debt ceiling. Even though a deal was eventually secured, both consumer and business
confidence were damaged by the political grandstanding. With an election due in 2012, this gridlock on
Capitol Hill can be expected to continue, and unless progress is made soon the US will confront another
year of economic headwinds stemming from an inappropriate fiscal policy.
China was not without its own policy issues either, despite the appearance of an enviable growth rate of
above 9.0%. Inflation needed managing lower in a way that would not threaten a bursting of its real
estate bubble, especially given concerns over the quality of its loans, many of them largely hidden in
local governments and in the provinces.
Both of these situations should be manageable, however, without a fallback into recession, but the
political dimension complicates matters in a way that makes the ultimate outcome much less certain and
secure. Of course complicating the situation even further still are the Eurozone’s sovereign debt
problems, for the ramifications of these issues stretch way beyond Europe’s shores having the potential
to drag the rest of the world, already vulnerable, down with it.
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Outstanding debt in the US by sector
Domestic Finance Corporate HouseHold
Source : Federal Reserve
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Once again the economic risks stemming from Greece’s insolvency have been amplified considerably
by political mishandling of the situation. Over the course of almost two years this issue has been
variously left to fester, or addressed with only temporary ‘sticking plaster’ solutions. The long-term
structural issues of competitiveness have never been convincingly addressed, and the generation-long
Euro-wide socio-economic consensus of ever increasing public spending has never been seriously
challenged. Only now that the problem has become a crisis of confidence in the European single
currency itself are policy makers realising that the proverbial ‘can’ cannot continue to be kicked
indefinitely down the road. Only now are the Eurozone’s leaders recognizing the need to have a
coordinated fiscal policy as well as a single monetary policy. Unfortunately they no longer have the
political capital necessary to implement one amidst increasingly sceptical populations.
As Europe’s debt crisis threatens to engulf not just Greece, but the rest of the Eurozone (to say nothing
of the nascent recoveries in other parts of the world), we think it is worth drawing attention to our
comments in April when we discussed the effect of the first ECB interest rate increase on the peripheral
economies noting that ‘this will make recovering from strong deflationary forces already underway even
harder still. Given the unstable socio-political situation in these countries, the impact could be much
greater. And to the extent that deflating growth in these countries is effectively the main objective in
order to restore competitiveness …., the Eurozone should be careful what it wishes for. If it leads to an
outright debt and solvency crisis that is unrecoverable, it could ultimately spark the demise of the single
currency. While this is not our central view, the risks are perhaps greater than many might think.’
That the ECB was still not prepared last week to accept that it made a monetary policy mistake earlier
this year is of course a very worrying signal, ultimately risking a much harder recession. By the time the
ECB does move to reverse this year’s policy tightening, the danger is that they will still be behind the
curve. For now though the ECB is sticking to its view that it is the monetary transmission mechanism
that is broken, not the monetary policy itself. We may not yet be at the stage where the single currency’s
days are numbered, but things are clearly coming to a head much sooner than we thought for the
individual governments involved as well as for the Eurozone’s institutions. This week saw the effective
failure of the first Eurozone bank in this crisis, and even though there are said to be broad agreements
in principle on the way ahead, there is still an absence of hard ideas about how to get there. Once again
decisions have been postponed to another round of global meetings and summits, this time in early
November.
Ultimately of course a Greek default now appears likely, but the management of that eventual outcome
is what will make the difference between whether the world economy continues to grow, albeit slowly, or
whether it faces another slump. The latest round of economic data for September at least offer some
encouraging signals that the two
largest economies in the world are
still managing to skirt recessionary
forces, with composite PMI
readings both nudging higher
during the month. However, the
bickering and arguments between
the US and the Eurozone recently,
to say nothing of those within
Europe, do little to foster hopes
that all will end well. The lesson of
the last few months would appear
to be that the world would be
better served if the political
dimension was more supportive of, and less disruptive to, the measures that need to be taken to nurture
and sustain economic recovery and growth. That way, we may stand a chance of avoiding the fall back
into a recession that should really have been avoidable.
An abridged version of this article was published in The National on 1st October 2011.
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ISM in the US rebounds slightly
ISM Manufacturing PMI ISM Non-Manufacturing PMI
Source : Bloomberg
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GCC Macro Khatija Haque
The GCC has been relatively resilient in the face of the deterioration in the global economic
environment over the last couple of months. Oil production continues to underpin GDP growth,
and relatively high oil prices have allowed governments to continue with ambitious spending
plans. Indeed Qatar even announced substantial wage increases in the public sector last
month. However, the non-oil sectors are starting to show some signs of weakness, and remain
vulnerable to a global slowdown. The risks to our regional growth forecasts remain on the
downside, particularly for 2012.
September’s OPEC output data showed the first (albeit small) decline in GCC oil production this year.
Saudi Arabia, UAE, Kuwait and Qatar produced a combined 15.7mn bpd last month, down from 15.8
mn bpd in August. The marginal decline was in Saudi Arabia, as both the UAE and Kuwait increased
output slightly last month. Nevertheless, year-to-date, the GCC states’ oil production is 8.7% higher
than the 2010 average.
Interestingly, Libyan oil production
rose to 100,000 bpd in September,
the first increase in oil production
since the start of this year, but is
still well below the 1.6mn bpd pre-
war levels and OPEC does not
expect a return to ‘normal’
production levels until end-Q1 12.
We maintain our view that GCC oil
production is likely to remain around
current levels for the rest of the
year.
Notwithstanding some weakness in recent weeks, oil prices are still almost 40% higher than the 2010
average and have provided a substantial boost to the region’s coffers. Consequently, fiscal policy
continues to underpin the private sector, particularly in Saudi Arabia and Qatar. The Saudi
Labour Minister confirmed that the payment of unemployment benefits (announced in Q1 11) would
commence from November, a month earlier than we had expected; and Qatar announced substantial
increases in public sector wages last month that are estimated to cost the budget an extra QAR 30bn
this fiscal year and QAR 10bn per year thereafter. We have revised down our estimates for Qatar’s
2011/12 budget surplus to 7.0% of GDP from 8.4% previously, on the back of the wage hikes.
The private sector is showing some signs of weakness, however. Saudi Arabia’s September PMI
reading showed the largest drop since the series began, declining 3.4 points to 54.5. The UAE’s PMI
reading was a little more encouraging, showing a slight rise in September to 52.1 from 50.9. In both
cases, the pace of expansion in the private sector was much weaker in Q3 than in earlier this year,
suggesting that global developments are filtering down to the region’s non-oil sectors.
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Oil production by GCC OPEC members
GCC oil production
GCC quota
Source: Bloomberg, Emirates NBD Research
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Saudi Arabia: HSBC PMI Index
Source: HSBC, Markit
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Source: HSBC, Markit
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Liquidity conditions in the region
have also tightened a little over
the summer, as deposits across
the biggest three economies
declined. However, money supply
growth on an annual basis is still
positive, even where government
deposits are excluded from the
measure. In the UAE, bank
deposits declined AED 35.2bn in
August after a AED 12.4bn drop in
July. Banks’ holdings of certificates
of deposit also declined more than
AED 25bn in June through August,
suggesting that banks needed the cash.
Private sector credit continues to surge in Qatar (18.9% y/y in August) and to a lesser extent
Saudi Arabia (9.2% y/y in August). The UAE continues to lag behind the rest of the region, with
private sector credit (including non-bank financial institutions) at under 1% y/y in H1 11.
Inflation has beaten our expectations across the region so far this year, despite rising global
food prices and we have revised down our 2011 inflation forecasts for all the GCC countries,
except Kuwait. In the UAE, Qatar, and Bahrain, housing costs have declined, keeping headline
inflation contained. In Saudi Arabia, housing costs have risen by less than we had anticipated at the
start of this year. Demand-driven inflationary pressures are becoming evident however, and we expect
this to continue to build in Saudi Arabia and Qatar, particularly as the authorities have substantially
increased public sector wages and other social benefits.
We acknowledge that the risks to our GCC growth forecasts are on the downside, particularly
for 2012 as oil production is likely to decline in the face of slower global growth and a return to normal
oil production in Libya. However, we have held off revising our growth forecasts for now, as many of
our non-oil sector indicators and data series are released with a substantial time-lag.
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Fixed Income Nick Stadtmiller
Dollar interest rates have risen considerably in the past two weeks, reflecting positive
economic news and improving optimism among investors. Rates are highly correlated to risk
measures, however, and we anticipate that this will remain the case in coming months.
Although risk assets have rallied lately, conditions in funding markets for USD and EUR have
not eased. Liquidity has tightened somewhat in the UAE, but strains in global conditions are
unlikely to impact local markets to the extent they did in 2008.
USD rates bounce off of lows last week
USD rates came close to testing their lows at the beginning of last week. The 10y Treasury yield hit
1.76% on 3 October (versus a low of 1.72% on 22 September), while the 5y yield closed at 0.85%
(versus a low of 0.78%). The movement since has been uniformly higher for rates, in line with the
broader sanguine attitude
towards risk assets over the past
week. The 10y yield closed
Wednesday at 2.21%, while the
5y yield finished at 1.15% – a
significant move.
The rise in US rates is probably
in good part due to the positive
economic flow, but this does not
impact our forecasts. Recent
economic data has convinced
many that the US is not entering
a recession for the moment
(although growth is weak). However, our forecast for rates to stay low through the end of the year was
not premised on the US entering recession. Rather, we see macro-driven volatility, primarily due to
Eurozone problems, as the primary factor behind lower rates going forward. We reiterate our year-end
forecasts for the 5y Treasury yield of 1.09% (1.39% for the 5y swap) and for the 10y of 1.78% (1.98%
for the swap).
To test the relationship between
risk and interest rates, we looked
at the correlation between the
10y Treasury yield and the VIX,
the so-called ‘fear gauge’.
Interestingly, the correlation is
stronger than it has been for any
time in the last three years. The
6m correlation between the two
is currently -0.95 (the negative
sign makes sense; rates go down
when risk rises). In other words,
rates have moved almost one-to-
one (although in opposite direction) to volatility in recent months. To be complete, we looked at rates
against a host of other risk measures – including CDS indexes, funding spreads and currency crosses
– and obtained similar results. This reinforces our sense that US rates will remain low as long as
macro uncertainty persists and markets remain volatile.
USD and EUR funding reflect Eurozone tensions
Dexia’s breakup shows that the strains on the European banking sector are coming to a head.
Apparently, funding problems contributed to the bank’s unravelling. It is ironic that the ECB thinks that
there is ample liquidity in the system and that extending term funding from the central bank will solve
banks’ funding problems. As of the end of June, 2011, Dexia had EUR 34bn in funding from the ECB,
which was over 35% of its total short-term funding.
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Treasury yields rebound slightly (%)
5y (lhs) 10y (rhs)
Source: Bloomberg, Emirates NBD Research.
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Rolling 6m Correlation - 10y Treasury Yield and VIX
Source: Bloomberg, Emirates NBD Research.
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Despite the recent rise in dollar
rates and tightening in some global
CDS indexes over the past week,
funding indicators continue to point
to a stressed market. 3m USD
LIBOR has risen almost every day
since mid-July, and its current level
– 0.40% – is its highest of the year
and 15bp higher than it was on 15
July. Forward markets are
anticipating LIBOR to increase
further in the next quarter.
The market has begun to price in
cuts by the ECB in the coming
months. Although this has served
to push 3m EONIA swaps down
(which represent the market’s
expectation of overnight rates), the
reduction has not passed into 3m
EURIBOR. While 3m EONIA
swaps are 40bp lower than at the
beginning of August (currently at
0.84%), 3m EURIBOR is only 4bp
lower at 1.57%.
In short, funding markets have not
eased in response to the recent rebound in risk assets and rise in rates. We do not see scope for a
significant rise in dollar rates until there is more clarity on the resolution to problems in Europe and
market volatility declines considerably.
Local liquidity a tad tighter
Strains in global liquidity have begun to impact conditions in the UAE, although the effect has been
relatively muted. UAE Central Bank data show that total deposits fell in August for the second
consecutive month (see GCC Macro section), which has pushed the loan-to-deposit ratio back up to
98.0% - similar to levels seen in January and February of this year.
One way to gauge the impact
of this reversal in banks’
liquidity is through the AED
forward markets. Currency
forwards are priced based on
the interest-rate differential
between two currencies, so
forwards on USD/AED show
the difference between dollar
and dirham rates. Negative
values for forwards indicate
lower dirham rates than
dollar rates, and vice versa.
(To be precise, the interest-
rate differential in question is actually deposit rates, rather than benchmark lending rates, such as
EIBOR.) The AED 12m forward moved consistently lower this year from Q1 through mid-August,
reflecting increasing liquidity during that time. It has since rebounded, and the forward’s recent levels,
just below par, are near where they traded in May and June.
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LIBOR's steady climb
3m LIBOR 3m OIS
Source: Bloomberg, Emirates NBD Research.
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3m EURIBOR 3m EONIA
Source: Bloomberg, Emirates NBD Research.
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Source: Bloomberg, Emirates NBD Research.
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Meanwhile, 3m EIBOR has held steady. EIBOR has changed little since late July, after a considerable
fall of over 60bp in the prior three months. However, the rise in USD LIBOR since that time has meant
that the spread between EIBOR and LIBOR has continued to narrow, albeit at a slower pace than in
Q2. There is probably little
scope for EIBOR to fall further
in present conditions, although
we would not expect much
change in this benchmark rate
in the very short term, unless
global conditions were to
worsen substantially.
In our view, tighter global
liquidity conditions will pass
through to local markets to a
lesser extent than they did in
2008. Even though the loan-
to-deposit ratio has increased
in recent months, it is still considerably lower than the latter half of 2008, when the figure hit a high of
112.4% in September of that year. A loan-to-deposit ratio greater than 100% implies that banks are
dependent on sources of finance other than customer deposits to fund their loan book. In 2008, UAE
banks relied heavily on international interbank markets for short-term funding. Local banks’
dependence on this form of funding is much lower now. Net interbank borrowing from banks abroad
(total borrowing minus lending) for all UAE banks is currently only 1.7% of total assets, per the most
recent figures available as of July. Although local conditions are certainly not immune from global
market tensions, the UAE banking sector appears to be on a relatively solid footing.
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EIBOR and USD LIBOR
3m EIBOR 3m USD LIBOR
Source: Bloomberg, Emirates NBD Research.
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Currencies Tim Fox
Although the USD strengthened against most currencies since our last edition, the last few
days has seen it give back many of these gains especially against major currencies with the
dollar index currently down -2.85% from its October 4th
peak. Compared to this time a month
ago the EUR is now 0.83% firmer against the USD, while the JPY has risen by 0.88%.
Of course within that period the EUR/USD reached a low of 1.3146 and GBP/USD fell at one point to
1.5272. By and large the main FX losers have been emerging market risk currencies, such as the
KRW, ZAR, NZD and BRL, reflecting continued concerns about global growth and a heightened sense
of risk aversion. However, it is the pullback from the lows by major currencies that have been the most
striking recent development, causing much consternation and some speculation that the USD’s rally
may be over. Our view is that these currency rallies reflect short covering from oversold positions (see
chart below) and that EUR weakness will eventually resume.
The main factor responsible for
the recent recovery in the EUR
is the expectation that the EU
authorities will finally get to
grips with the Eurozone debt
crisis, by recapitalising the
banks, providing backstop
support to other peripheral
Eurozone member states, and
arranging an orderly
restructuring of Greek debt. In
addition the ECB refrained from
cutting interest rates this month,
which restored some interest
rate support for the single currency, accounting for this week’s sharp short-covering rally (see chart).
On all of these issues, however, there are strong reasons to doubt whether EU policymakers will be
successful in stabilising its debt crisis quite so easily, and whether the ECB’s failure to cut interest
rates this month is anything other than a postponement of the inevitable.
EUR scepticism remains well founded
Although it now appears that Greece will receive the EUR 8bn of funding it was due in September, this
will only be made available in November, by which time the focus will already be shifting to the next
tranche of aid due in December. Producing an ‘orderly’ restructuring of Greek debt will remain a
significant challenge in the context of the substantial haircuts now expected on private-sector holdings
of Greek bonds. Boosting the firepower of the European Financial Stability Facility (EFSF) also looks
problematic, given the difficulties that have already been encountered in ratifying earlier (and less
contentious) reforms to the EFSF. The fact that the political squabbles in a state as small as Slovakia
can hold up progress on such an enormous issue does not bode well for the success of future reforms.
In terms of recapitalising the banks, the success of the Dexia Bank restructuring also illustrates the
nature and the scale of the likely problem, if such an institution (with a 12.1% core tier one capital
adequacy ratio according to the latest stress tests) was unable to access enough liquidity despite the
ECB’s manifest efforts. In terms of the latest ECB measures to provide liquidity in the financial system
(through the purchase of covered bonds and the provision of two long-term financing operations), we
doubt if this will be sufficient to offset the economic downdraft that appears to be looming. Ultimately
ongoing fiscal austerity measures across the Eurozone will likely result in substantial growth risks
causing the ECB to reverse its course on policy rates. The longer it takes the greater will be those
downside risks to the both economic growth and to the single currency.
The charts on page 14 show the relationship between the EUR/USD exchange rate and the Eurozone-
US 2-year interest rate differential. The steep rise in EUR/USD earlier this year occurred when the
market began to discount rising Eurozone interest rates, while the steep fall since September
happened when the markets began to price in ECB cuts. That such thoughts have been put on hold
accounts for the renewed widening in spreads and the subsequent rally in EUR/USD. Once they come
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back to the fore, however, (which they likely will do in November) then the probability is that
differentials will narrow again resulting in renewed pressure on the EUR.
US data improves, USD underpinned
Of course the USD side of the equation is equally important and here the recent signs of stability in US
growth help to anchor our view that there will be no further need for the Fed to reintroduce Quantitative
Easing. Q3 US economic growth appears likely to be in excess of 2.0%, and up from 1.3% in Q2,
meaning that the status quo in policy terms will remain ‘Operation Twist’ through the rest of the year. In
our view the hurdle for QE3 was already a high one, even as the US economy turned down during the
early summer. Since then inflation has risen slightly and the activity data has been more encouraging,
suggesting that only an abrupt shock to the US economy might put QE3 back on the table. As such a
shock is probably most likely to be caused by external factors (such as a deepening of the Eurozone
financial crisis), then its effects are likely to be symmetrical across the global financial system. In such
a scenario QE3 may return as an option (as hinted at in the September FOMC minutes), but as it will
likely be being considered everywhere else as well the impact on the USD should be less than during
previous periods of QE. In fact in such an environment risk aversion is likely to be the decisive
influence in helping to keep the USD underpinned.
Bank of England remains proactive
As we anticipated last month the Bank of England moved proactively to initiate a further round of
monetary stimulus, announcing QE2 worth GBP 75bn this month, on top of the GBP 200bn of Gilts
purchased previously. While this should help to maintain pressure on GBP, especially versus the USD,
ultimately the proactive nature of this move should be to the UK economy’s advantage especially
against a Eurozone whose central bank is behind the curve. While the Eurozone economy is at risk of
falling into recession in 2012, the UK economy should begin to recover gradually from its torpor. For
this reason, we continue to see downside risks for EUR/GBP back towards 80.0 over the 6-month time
horizon.
USD/JPY upside in play
Finally USD/JPY is beginning to show some encouraging signs of stirring from its recent 76-77 range.
We drew attention in our FX Weekly this week to US-Japan 2-year interest rate spreads (see page 14),
which have a long-standing correlation with the USD/JPY exchange rate, and which are now
suggesting that a move towards 79 might be on the cards. Behind this move in spreads has been the
more optimistic signs from the US economy, while Operation Twist has also exerted upward pressure
on 2-year yields, and while we do not wish to get carried away by this our sense is that a return to 80 is
probably warranted by the end of the year. On top of this factor, the markets are suspecting that the
Bank of Japan may soon adopt a similar target floor to USD/JPY that the SNB attached to EUR/CHF
with such recent success. Whether this happens or not, encouraging the thought process cannot be a
bad thing if the markets appear content to do the BOJ’s bidding.
ENBD Research 11
G L O B AL M AR K E TS AN D TR E AS U R Y f r o m
Equities Irfan Ellam
Globally sentiment has improved towards the end of last month and continued into October,
with the MSCI World Index +3.6% 1m and VIX SPX falling -15.3% 1m to 31. Developed markets
outperformed EM, with the MSCI G7 index +3.3% 1m vs -4.3% 1m for the MSCI EM index. The
STOXX Europe 600 index was +8.2% 1m driven by improving sentiment, as Eurozone policy
makers started showing not only recognition but also an increasing willingness to tackle the
issues facing Europe with action.
Developed Markets
All eyes remain on Europe, Eurozone claims first casualty
All eyes remain on Europe, with Greece at a critical juncture, as time and cash run out. Within 3 to 4
weeks the government is expected run out of funds. It now appears that Greece will get the EUR 8bn
tranche in November when EU Ministers and the IMF Board will make the final decision but we believe
it will have minimum impact on equity markets, as it is already priced in. The penny finally appears
have dropped as European leaders Merkel and Sarkozy announced they intend to formulate a plan, by
the 3 November G20 summit, to recapitalise European banks and address the Greek debt crisis.
Following the French and German PMs comments equity markets shrugged off the Fitch downgrade of
Italy (to A+ from AA-) and Spain (to AA- from AA+). Both Germany and France appear to be softening
their respective stances, in relation to the source of funding for recapitalisation, ESFS versus sovereign
funding, but at the same time hardening the stance towards private investors, which could require
investors to take a bigger share of losses. The ECB left rates unchanged at 1.5%, following surprise
3% inflation in September 2011, however this gives scope for a cut in November 2011, which in
conjunction with a bank recapitalization plan should act as a strong positive catalyst for equity markets.
By contrast the UK stepped ahead of the curve with an extra GBP 75bn of stimulus in the form of QE2,
leaving FTSE100 +3.5% mtd.
Any delay in the payment to Greece or announcing the details of plans to recapitalize the banks would
put a swift end to the current risk rally, both in Europe and the US. We remain cautious whether a
realistic plan to address the Greece issues can be formulated by 3 November, given the short time
frame.
The Eurozone crisis claimed it first casualty. Dexia Banks’s share price collapsed, falling over 50% at
one stage, before being suspended and the Bank announcing a restructuring which will see it split into
a ‘good’ bank and ‘bad’ bank.
Belgium’s government announced
it would pay US$ 5.4bn to take over
the local consumer lending unit and
guarantee 60% of the ‘bad’ bank,
according the Belgium Finance
Minister. If a market credible
solution to the Eurozone crisis is
not found in a timely manner this
may be the first of many such bank
restructurings. Belgium remains
under pressure having been put
under credit review by Moodys.
US markets fell earlier in the month, spooked by the debt crisis in Europe and the implications on
economic and earnings growth with the S&P500 briefly entering bear market territory, testing key
supports, before rising higher on above expectation rise in US payrolls (+103,000) and stronger than
expected results from the ISM survey of manufacturing. The passing away of Steve Jobs did nothing to
dent Apple share price and the launch of the iPhone 4S has been the most successful iPhone launch
to date, with sales of over 1mn units on the first day. Apple may however come under pressure to
utilize its USD 75bn cash pile, either in the form of share buybacks or payment of dividends.
40
50
60
70
80
90
100
110
120
130
Dexia Relative Performance
Dexia BBG Europe 500 Banks Index
Source: Bloomberg, Emirates NBD Research
ENBD Research 12
G L O B AL M AR K E TS AN D TR E AS U R Y f r o m
Emerging Markets
Emerging markets were weaker over the month with the MSCI EM index -4.2%, with MSCI EM Eastern
Europe down-4.9% 1m, a recovery from intramonth falls of-14.5%, driven by weakness in Russia due
to the negative sentiment towards the potential re-election of Putin as President in Russia, possibly for
2 terms of 4 years each, and the implications for economic and social reform. China was weaker earlier
in the month as the real estate sector reported lower sales, especially over the ‘Golden Weekend’ but
reduced earlier losses as state entities started buying banking shares, with the HSCEI -3.6% 1m, a
recovery from -10.5% earlier and +7.7% mtd. Turkey gained 4.7% 1m but gave up those gains to
-0.6% mtd, on currency weakness driven by Eurozone worries, forcing government intervention in the
markets.
MENA Markets
Frontier markets outperformed emerging markets despite drop of -10.1%1m on the EGX 30 index, but
nonetheless declined over the month with the MSCI Frontier Markets index down -3.1% over the last
month.
The ADX fell -3.9% 1m and the DFM -4.9% 1m as the Eurozone crisis, pushed the Dubai CDS up to
464bp from 424bp in September and a month high of 537bp, potentially increasing refinancing costs
but not putting refinancing itself at risk. Regional markets offer value but remain range bound on weak
volumes and need a catalyst to move higher, such as a meaningful return of foreign institutional
investors. However we would not expect such a risk-on trade, until there is further clarity and resolution
on the Eurozone issues.
The Q3 2011 reporting season kicked off, with optimism of strong earnings pushing the Tadawul to a
near 3 week high. The optimism appears to be justified with early indications of above consensus
earnings growth:
SAFCO, 42.9% owned by SABIC, reported net income of SAR 1.2bn (+53% q/q, +100% y/y,
+20% RTRS consensus), hence a positve read-through for market heavy weight SABIC.
Yanbu posted net income of SAR 125mn (-17% q/q, +33% y/y, +13% BBG consensus) as
sales rose on higher demand y/y, with the q/q decline attributed to the Ramadan and Eid
effect.
Egypt continued its slide, with the EGX 30 -10.7% 1m, on funding concerns, have turned down the IMF
funding because of the stringent conditions attached and instead hoping to raise USD 5bn from Gulf
states, hopes which could be dampened because of sectarian violence this week. Egyptian equities
appear cheap, having fallen -45% ytd and the EGX 30 trading on 5.6x Best PE, 1.1xPB and a 5.2%
dividend yield according to Bloomberg.
ENBD Research 13
G L O B AL M AR K E TS AN D TR E AS U R Y f r o m
GCC in Pictures
8
10
12
14
16
18
Jan-08 Jan-09 Jan-10 Jan-11
mn
bp
d
GCC* Oil Production
Oil production
Quota
*Excludes Bahrain and OmanSource: Bloomberg, Emirates NBD Research
0
20
40
60
80
100
120
140
Jan-08 Jan-09 Jan-10 Jan-11
US
D p
er barr
el
OPEC Reference Oil Price
Source: Bloomberg, Emirates NBD Research
-8
-6
-4
-2
0
2
4
6
8
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11
% y
/y
Inflation
Qatar
UAE
KSA
Source: Bloomberg, Emirates NBD Research
0
100
200
300
400
500
600
20
40
60
80
100
120
140
160
180
200
Jan-11 Mar-11 May-11 Jul-11 Sep-11
bp
CDS spreads
Abu Dhabi
KSA
Dubai (rhs)
Source: Bloomberg
0
5
10
15
20
25
30
35
40
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11
% y
/y
Money supply, excl govt deposits
KSA
UAE
Qatar
Source: Bloomberg
-5
0
5
10
15
20
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11
% y
/y
Private sector credit
Qatar
UAE
KSA
Source: National central banks, Emirates NBD Research
ENBD Research 14
G L O B AL M AR K E TS AN D TR E AS U R Y f r o m
FX – Major Currency Pairs & Interest Rates
1.25
1.30
1.35
1.40
1.45
1.50
0
40
80
120
160
200
Oct-10 Jan-11 Apr-11 Jul-11 Oct-11
Interest Rate Differentials - EUR
2y EUR - USD swap rate (bp, lhs) FX (rhs)
1.50
1.55
1.60
1.65
1.70
60
70
80
90
100
110
Oct-10 Jan-11 Apr-11 Jul-11 Oct-11
Interest Rate Differentials - GBP
2y GBP - USD swap rate (bp, lhs) FX (rhs)
75.0
77.5
80.0
82.5
85.0
87.5
0
10
20
30
40
50
60
70
Oct-10 Jan-11 Apr-11 Jul-11 Oct-11
Interest Rate Differentials - JPY
2y USD - JPY swap rate (bp, lhs) FX (rhs)
0.75
0.85
0.95
1.05
-20
0
20
40
60
Oct-10 Jan-11 Apr-11 Jul-11 Oct-11
Interest Rate Differentials - CHF
2y USD - CHF swap rate (bp, lhs) FX (rhs)
0.925
0.950
0.975
1.000
1.025
1.050
1.075
-125
-100
-75
-50
-25
Oct-10 Jan-11 Apr-11 Jul-11 Oct-11
Interest Rate Differentials - CAD
2y USD - CAD swap rate (bp, lhs) FX (rhs)
Source : Bloomberg, Emirates NBD Research Data as of 7 October 2011
ENBD Research 15
G L O B AL M AR K E TS AN D TR E AS U R Y f r o m
-30%
-20%
-10%
0%
10%
20%
31-Aug 7-Sep 14-Sep 21-Sep 28-Sep 5-Oct 12-Oct
Asian Emerging Stock Indices since September, 2011
Taiwan Stock ExchangeJakarta IndexHo Chi Minh IndexSensexKospi Index
Major Equity Markets
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
31-Aug 7-Sep 14-Sep 21-Sep 28-Sep 5-Oct 12-Oct
US Stock Indices since September, 2011
S&P 500 Index Nasdaq Composite Index
-15%
-10%
-5%
0%
5%
10%
31-Aug 7-Sep 14-Sep 21-Sep 28-Sep 5-Oct 12-Oct
European Stock Indices since September, 2011
FTSE 100 Euro Stoxx 50 Index Euro Stoxx 600 Index
-12%
-8%
-4%
0%
4%
31-Aug 7-Sep 14-Sep 21-Sep 28-Sep 5-Oct 12-Oct
Latin America Stock Indices since September, 2011
Mexico Stock Index Bovespa Index
-40%
-30%
-20%
-10%
0%
10%
20%
31-Aug 7-Sep 14-Sep 21-Sep 28-Sep 5-Oct 12-Oct
Emerging Europe Stock Indices since September, 2011
WIG 20 Index RTSI$ Index Istanbul 100 Index
Source : Bloomberg, Emirates NBD Research Data as of 12 October 2011
-20%
-15%
-10%
-5%
0%
5%
4-Sep 11-Sep 18-Sep 25-Sep 2-Oct 9-Oct
MENA Equity Markets since September, 2011
Qatar MoroccoMuscat Abu DhabiDubai BahrainSaudi Arabia KuwaitEgypt
ENBD Research 16
G L O B AL M AR K E TS AN D TR E AS U R Y f r o m
Key Economic Forecasts UAE 2008 2009 2010 2011f 2012f
Nominal GDP $bn 1156.3 992.8 1093.1 1264.6 1356.5
Real GDP % 3.3 -1.6 -1.4 4.6 4.2
Current A/C % GDP 7.4 3.1 8.1 13.1 12.3
Budget Balance % GDP
16.2 -13.1 -2.1 2.0 1.4
CPI % 12.3 1.6 0.9 1.0 2.5
Saudi Arabia 2008 2009 2010 2011f 2012f Nominal GDP $bn 476.3 372.7 447.7 553.5 592.0
Real GDP % 4.2 0.2 4.1 6.5 5.5
Current A/C % GDP 27.8 5.6 14.9 23.2 17.7
Budget Balance % GDP 32.5 -6.2 6.5 13.5 12.1
CPI % 9.9 5.1 5.4 4.9 5.0
Qatar 2008 2009 2010 2011f 2012f Nominal GDP $bn 115.3 97.8 127.3 176.8 193.3
Real GDP % 17.7 12.0 16.2 17.9 7.7
Current A/C % GDP 28.7 12.4 15.2 24.8 24.2
Budget Balance % GDP 10.0 15.2 7.8 7.0 6.7
CPI % 15.2 -4.9 3.6 2.1 4.0
Kuwait 2008 2009 2010 2011f 2012f Nominal GDP $bn 148.8 109.5 128.9 152.1 165.9
Real GDP % 6.0 -6.1 3.3 5.0 4.6
Current A/C % GDP 37.8 27.0 32.0 37.9 35.3
Budget Balance % GDP 6.9 20.4 14.3 21.6 19.6
CPI % 10.6 4.0 4.0 4.6 4.8
Oman 2008 2009 2010 2011f 2012f Nominal GDP $bn 60.4 46.8 57.8 68.7 74.7
Real GDP % 12.8 1.1 4.0 4.2 3.8
Current A/C % GDP 8.3 -1.3 8.8 12.0 12.0
Budget Balance % GDP 13.1 3.9 8.3 7.9 4.8
CPI % 12.5 3.7 3.1 4.2 4.1
Bahrain 2008 2009 2010 2011f 2012f Nominal GDP $bn 22.2 19.6 21.6 23.5 25.2
Real GDP % 6.3 3.1 4.5 2.2 4.1
Current A/C % GDP 10.2 2.9 3.6 3.6 5.9
Budget Balance % GDP 7.4 -5.1 -5.7 3.2 2.1
CPI % 3.5 2.8 2.0 0.8 2.0
GCC average 2008 2009 2010 2011f 2012f Nominal GDP $bn 321.4 257.8 301.5 367.2 392.7
Real GDP % 6.1 0.3 3.9 7.2 5.2
Current A/C % GDP 22.5 7.3 14.2 21.8 18.8
Budget Balance % GDP 20.9 -2.3 6.1 11.1 9.9
CPI % 11.2 2.7 3.6 3.4
4.1
ENBD Research 17
G L O B AL M AR K E TS AN D TR E AS U R Y f r o m
Key Economic Forecasts
US 2009 2010 2011f 2012f
Real GDP %
-3.5 3.0 1.5 2.0
Current A/C % GDP
-2.7 -3.2 -3.0 -2.5
Budget Balance % GDP
-10.6 -8.8 -8.5 -7.0
CPI %
-0.3 1.6 3.0 2.0
Eurozone 2009 2010 2011f 2012f
Real GDP %
-4.1 1.7 1.5 1.0
Current A/C % GDP
0.1 1.7 0.0 0.1
Budget Balance % GDP
-6.3 -6.0 -5.0 -3.6
CPI %
0.2 1.5 2.5 1.5
UK 2009 2010 2011f 2012f
Real GDP %
-4.9 1.4 1.0 1.5
Current A/C % GDP
-1.7 -3.2 -2.2 -2.2
Budget Balance % GDP -10.9 -10.2 -9.0 -7.0
CPI %
2.2 3.3 4.0 1.8
Japan 2009 2010 2011f 2012f
Real GDP %
-6.3 4.0 0.0 2.5
Current A/C % GDP
2.8 3.6 3.0 3.0
Budget Balance % GDP -10.4 -9.8 -10.0 -8.0
CPI %
-1.3 -0.7 0.2 0.0
China 2009 2010 2011f 2012f
Real GDP %
9.2 10.3 9.0 8.5
Current A/C % GDP
5.8 5.7 5.0 5.0
Budget Balance % GDP -2.2 -1.6 -2.0 -1.0
CPI %
-0.7 3.3 5.5 4.0
India 2009 2010 2011f 2012f
Real GDP %
9.1 8.8 7.9 8.4
Current A/C % GDP
-2.9 -2.6 -2.8 -2.7
Budget Balance % GDP -6.2 -4.7 -5.0 -4.5
WPI %
2.1 9.4 10.8 8.5
ENBD Research 18
G L O B AL M AR K E TS AN D TR E AS U R Y f r o m
FX & Policy Rate Forecasts
FX Forecasts – Major Forwards
Spot 12.10 3M 6M 12M 3M 6M 12M
EUR / USD 1.3791 1.30 1.25 1.25 1.3780 1.3776 1.3770
USD /JPY 77.26 80.0 85.0 90.0 77.14 77.01 76.68
USD / CHF 0.8949 0.92 0.96 1.00 0.8932 0.8911 0.8864
GBP / USD 1.5752 1.55 1.60 1.65 1.5737 1.5725 1.5701
AUD / USD 1.0159 1.00 0.95 0.90 1.0045 0.9956 0.9796
USD / CAD 1.0172 1.02 1.04 1.07 1.0193 1.0207 1.0228
EUR / GBP 0.8756 0.84 0.78 0.76 0.8757 0.8762 0.8771
EUR / JPY 106.56 104.0 106.0 112.50 106.56 106.56 106.55
EUR / CHF 1.2343 1.20 1.20 1.25 1.2310 1.2278 1.2207
FX Forecasts – Emerging Forwards
Spot 12.10 3M 6M 12M 3M 6M 12M
USD / SAR* 3.7503 3.75 3.75 3.75 3.7488 3.7477 3.7451
USD / AED* 3.6730 3.67 3.67 3.67 3.6728 3.6725 3.6725
USD / KWD 0.2761 0.285 0.282 0.28 0.2760 0.2771 0.2797
USD / OMR* 0.3850 0.38 0.38 0.38 0.3832 0.3815 0.3770
USD / BHD* 0.3770 0.376 0.376 0.376 0.3770 0.3783 0.3793
USD / QAR* 3.6414 3.64 3.64 3.64 3.6413 3.6414 3.6413
USD / EGP 5.9679 6.00 6.10 6.20
45.00
6.1258 6.3103 6.7103
USD / INR 48.9600 48.00 50.00 47.00 48.9668 48.9705 48.9758
USD / CNY 6.3599 6.35 6.25 6.15 6.3718 6.3758 6.3818
Policy Rate Forecasts
Current % 3M 6M 12M
FED 0 – 0.25 0.25 0.25 0.25
1.00
ECB 1.50 1.25 1.00 1.00
BoE 0.50 0.50 0.50 0.50
BoJ 0.10 0.10 0.10 0.10
SNB 0.25 0.25 0.25 0.25
RBA 4.75 4.75 4.50 4.25
SAMA (r repo) 0.25 0.25 0.25 0.25
UAE (1W repo) 1.00 1.00 1.00 1.00
CBK (dis. rate) 2.50 2.50 2.50 2.50
QCB (o/n depo) 0.75 0.50 0.50
0.50
CBB (1W depo) 0.50 0.50 0.50 0.50
CBO (o/n repo) 2.00 2.00 2.00 2.00
*denotes USD peg Data as of 12 October 2011
ENBD Research 19
G L O B AL M AR K E TS AN D TR E AS U R Y f r o m
Interest Rate Forecasts
USD Swaps Forecasts Forwards
Current 3M 6M 12M 3M 6M 12M
2y 0.65 0.59 0.54 0.79 0.72 0.80 1.03
5y 1.47 1.39 1.68 2.34 1.56 1.71 1.97
10y 2.37 1.98 2.32 3.01 2.46 2.50 2.69
2s10s (bp) 172 139 178 222 173 169 166
US Treasury Forecasts
2y 0.28 0.24 0.24 0.54
5y 1.15 1.09 1.38 2.09
10y 2.21 1.78 2.17 2.86
2s10s (bp) 193 154 193 232
AED-USD Swap Spreads (bp)
Current 3M 6M 12M
2y 107 114 117 85
3y 110 111 113 88
5y 113 101 102 84
AED Swap Rates (%)
2y 1.72 1.73 1.71 1.64
3y 1.96 1.94 2.07 2.38
5y 2.57 2.40 2.70 3.17
Source : Bloomberg, Emirates NBD Research Data as of 12 October 2011
ENBD Research 20
G L O B AL M AR K E TS AN D TR E AS U R Y f r o m
Global Equities Market Watch
Index Last Close 1d% chg Traded
Value (USD mn)
wtd% chg mtd% chg ytd% chg
Developed Markets Dow Jones Industrial Average Index 11,519
11,5119 0.90 5,603
5,603 3.7 5.5 -0.5
S&P 500 Index 1,207 1,2071,20
7
0.98 28,592 28,592
4.5 6.7 -4.0
Nasdaq Composite Index 2,605 2,605
0.84 14,050 14,050
5.1 7.8 -1.8
FTSE 100 Index 5,442 5,5,442
0.85 5,020 5,020
2.6 6.1 -7.8
Dax Index 5,994 5,994
2.21 5,203 5,203
5.6 9.0 -13.3
Cac 40 Index 3,230 5,994
2.42 5,177 55,177 5,177
4.3 8.3 -15.1
Swiss Market Index 5,781 5,785,781
0.85 2,419 2,419
2.3 4.5 -10.2
Nikkei Index 8,739 8,739
-0.40 8,803 8,803
2.6 1.5 -13.7
S&P/ ASX 200 Index 4,204 4,204 4,204
-0.55 4,363 4,363
2.0 5.9 -10.6
Stoxx Europe 600 Index 239 239
1.65 32,441 32,441
3.1 5.7 -13.3
MENA Markets USD
101.00
6.410
99.50
104.50
105.00
Istanbul Stock Exchange National Index 59,420 1.29 1,061 3.6 -0.5 -10.0
Egyptian Exchange Index 4,050 0.81 41 2.5 -2.1 -43.3
Kuwait Stock Exchange Index 5,848 -0.20 105 0.4 0.2 -15.9
Tadawul All Share Index 6,105 -0.22 1,180 1.7 -0.1 -7.8
Bahrain Bourse All Share Index 1,148 -0.70 0 -1.6 -1.6 -19.9
Dubai Financial Market General Index 1,384 -0.30 12 -0.8 -3.4 -15.1
Abu Dhabi Securities Market General Index
2,487 -0.29 14 -0.3 -1.8 -8.6
Muscat Securities Index 5,519 -0.75 6 -0.3 -1.5 -18.3
Qatar Exchange Index 8,418 0.78 93 2.1 0.3 -3.0
MADEX Free Float Index 9,367 0.25 18 0.7 -0.1 -9.4
Emerging Markets
Hong Kong Hang Seng Index 18,329 1.04 3,128 5.5 6.2 -18.9
Shanghai Composite Index 2,420 3.04 13,136 2.9 2.9 -13.5
Korea Stock Exchange Index 1,810 0.81 4,972 4.1 3.6 -10.7
BSE Sensex 16,958 2.55 217 4.3 2.9 -17.5
Nifty 5,099 2.51 1,538 4.1 2.9 -17.1
Karachi Stock Exchange Index 12,059 0.04 53 2.0 2.8 0.5
Taiwan Stock Exchange Weighted Index 7,382 -0.22 3,116 3.0 2.8 -17.2
Bovespa Stock Exchange Index 53,838 - - 5.1 2.9 -22.3
Micex Index 1,397 2.38 2,434 3.3 2.2 -17.3
FTSE/JSE Africa All Share Index 31,130 1.06 1,508 2.9 4.9 -3.1
Vietnam Ho Chi Minh Stock Index 411 -1.63 21 -1.3 -3.5 -14.9
Jakarta Stock Exchange Composite Index
3,636 2.95 556 7.8 4.0 -0.3
FTSE Bursa Malaysia KLCI Index 1,429 1.19 201 3.0 4.0 -5.0
Mexican Stock Exchange 34,470 2.34 466 4.4 2.9 -10.6
Source : Bloomberg, Emirates NBD Research Data as of 12 October 2011
ENBD Research 21
G L O B AL M AR K E TS AN D TR E AS U R Y f r o m
Emirates NBD GCC Cash Bonds / Sukuk*
Security Name S&P Rating CCY Bid Bid YTM % 1 week ago 1 month ago 3 months ago
ADGB 5.5 12 AA USD 103.25 1.356 103.25 104.13 104.65
ADGB 5.5 14 AA USD 109.75 1.474 109.13 110.00 110.00
ADGB 6.75 19 AA USD 119.00 3.805 118.25 120.50 118.13
ADWA 3.925 20 AA USD 101.75 3.689 - - -
CBBISC 6.247 14 BBB USD 107.25 3.379 107.08 109.50 109.96
MUMTAK 5 15 BBB USD 98.00 5.603 98.10 100.86 99.99
DUGB 0 13 N.A. AED 93.00 6.809 93.75 95.50 95.65
DUGB 4.25 13 N.A. AED 97.50 5.998 99.00 99.38 99.65
DUGB 6.396 14 N.A. USD 100.87 6.075 99.96 104.62 105.20
DUGB 0 14 N.A. AED 99.75 5.273 101.15 104.14 104.47
DUGB 6.7 15 N.A. USD 101.00 6.410 99.50 104.50 105.00
DUGB 7.75 20 N.A. USD 98.00 8.067 95.00 105.75 106.00
DUGB 5.591 21 N.A. USD 94.75 6.323 93.00 99.25 99.75
ISDB 3.172 14 AAA USD 105.00 1.414 105.11 105.65 -
ISDB 1.775 15 AAA USD 100.00 1.775 100.06 100.54 -
MUBAUH 5.75 14 AA USD 107.75 2.592 107.81 109.56 109.32
MUBAUH 3.75 16 AA USD 102.25 3.210 101.54 104.71 101.77
MUBAUH 7.625 19 AA USD 119.00 4.616 117.80 123.42 119.11
MUBAUH 5.5 21 AA USD 103.75 5.000 102.07 107.03 101.74
TDICUH 6.5 14 AA USD 109.25 2.921 - - -
TDICUH 4.949 14 AA USD 106.50 2.687 106.11 107.51 106.74
QATAR 5.15 14 AA USD 107.75 1.931 107.85 108.89 108.70
QATAR 4 15 AA USD 104.75 2.473 104.49 106.19 104.98
QATAR 6.55 19 AA USD 118.00 3.765 117.64 122.22 116.86
QATAR 5.25 20 AA USD 109.37 3.910 108.46 113.49 107.60
QATAR 6.4 40 AA USD 120.50 5.032 119.21 124.59 110.88
QATDIA 3.5 15 AA USD 103.25 2.587 102.84 104.82 102.73
QATDIA 5 20 AA USD 105.25 4.274 104.70 110.08 103.15
RAKS 0 13 A AED 98.00 3.900 - - -
RAKS 8 14 A USD 113.50 2.881 113.63 115.00 116.50
RAKS 5.2392 16 A USD 107.25 3.403 108.07 109.19 108.74
INTPET 3.125 15 AA USD 100.50 2.993 100.27 102.95 99.61
INTPET 5 20 AA USD 101.50 4.794 100.36 103.62 99.34
ADCB 4.75 14 A USD 104.75 3.067 104.75 105.71 105.01
ADIBUH 0 11 N.A. USD 99.00 7.233 99.80 99.69 99.66
ADIBUH 3.745 15 N.A. USD 102.75 3.018 102.13 102.26 101.94
COMQAT 5 14 A- USD 104.50 3.449 104.66 107.31 106.87
COMQAT 7.5 19 BBB+ USD 117.00 4.925 115.79 118.38 114.29
DIFCDU 0 12 B+ USD 90.00 16.950 88.32 92.39 94.28
DIBUH 0 12 NR USD 98.12 5.100 98.50 98.58 98.60
EBIUH 0 12 NR USD 97.50 9.426 98.94 98.94 98.45
EBIUH 0 12 NR USD 100.50 3.968 100.69 101.64 102.13
EBIUH 0 13 N.A. AED 93.00 7.564 - - -
NBADUH 4.5 14 A+ USD 105.00 2.695 105.14 107.00 105.48
*Prices as of 12 October 2011
ENBD Research 22
G L O B AL M AR K E TS AN D TR E AS U R Y f r o m
Emirates NBD GCC Cash Bonds / Sukuk*
Security Name S&P Rating CCY Bid Bid YTM % 1 week ago 1 month ago 3 months ago
NBADUH 4.25 15 A+ USD 104.75 2.791 104.57 106.39 104.62
SIB 4.715 16 BBB+ USD 105.00 3.528 104.85 104.43 103.46
QIBC 3.856 15 N.A. USD 103.25 2.982 102.79 103.45 103.50
HSBC 3 15 N.A. USD 99.25 3.201 99.10 99.87 99.35
HSBC 3.575 16 N.A. USD 102.37 3.020 102.11 102.63 101.70
QNBK 3.125 15 A+ USD 99.50 3.256 99.22 101.18 99.74
SABBAB 3 15 A USD 100.25 2.934 100.82 101.52 100.47
DUBAIH 0 12 NR USD 94.50 20.380 92.14 94.38 95.36
DUBAIH 4.75 14 NR EUR 77.50 17.460 78.43 85.15 90.04
DUBAIH 6 17 NR GBP 68.00 15.200 67.99 76.64 83.20
ALDAR 5.767 11 N.A. USD 99.37 15.480 99.66 99.89 100.62
ALDAR 0 13 B AED 95.00 6.366 96.51 97.41 98.17
ALDAR 10.75 14 B USD 106.50 7.937 104.65 108.41 110.98
DARARK 0 12 N.A. USD 87.00 21.590 - - -
EMAAR 7.5 15 N.A. USD 90.50 10.320 93.74 100.18 104.02
EMAAR 8.5 16 BB USD 99.00 8.754 97.05 103.34 105.60
DEWAAE 0 13 N.A. AED 98.50 3.855 98.00 98.90 98.87
DEWAAE 8.5 15 N.A. USD 105.12 6.834 104.13 109.96 111.86
DEWAAE 6.375 16 N.A. USD 103.00 5.678 102.12 105.08 104.35
DEWAAE 7.375 20 N.A. USD 95.00 8.169 92.62 102.22 103.38
EMIRAT 5.125 16 N.A. USD 96.50 5.998 94.84 99.42 99.93
JAFZSK 0 12 B AED 90.00 12.750 88.39 92.59 94.39
DANAGS 7.5 12 N.A. USD 90.50 17.730 92.81 94.78 95.09
DPWDU 6.25 17 BB USD 98.00 6.674 97.36 104.58 103.92
DPWDU 6.85 37 BB USD 87.50 8.002 - - -
DOLNRG 5.888 19 N.A. USD 106.25 4.898 - - -
TAQAUH 5.62 12 NR USD 102.75 2.870 102.88 103.74 104.67
TAQAUH 6.6 13 NR USD 105.50 3.401 106.10 107.73 108.52
TAQAUH 4.75 14 N.A. USD 103.75 3.385 103.79 106.00 105.51
TAQAUH 5.875 16 NR USD 109.00 3.887 108.77 112.52 108.88
TAQAUH 6.165 17 NR USD 109.00 4.445 108.00 113.25 107.75
TAQAUH 7.25 18 NR USD 114.00 4.807 114.22 119.17 112.98
TAQAUH 6.25 19 N.A. USD 108.50 4.939 108.31 111.83 107.16
EMIRAT 0 12 N.A. USD 98.00 4.391 98.33 98.68 98.81
QRESQD 0 12 N.A. USD 97.50 4.304 99.10 98.95 98.33
QTELQD 6.5 14 A USD 109.00 2.939 108.43 110.81 111.14
QTELQD 3.375 16 A USD 100.25 3.320 99.50 101.41 100.12
QTELQD 7.875 19 A USD 120.25 4.692 119.49 124.60 120.64
QTELQD 4.75 21 A USD 99.25 4.850 97.36 102.68 98.24
RASGAS 4.5 12 A USD 101.50 2.891 - - -
RASGAS 5.5 14 A USD 107.50 2.834 - - -
RASGAS 6.75 19 A USD 117.00 4.212 - - -
SABIC 3 15 A+ USD 100.50 2.868 100.79 101.57 100.34
*Prices as of 12 October 2011
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G L O B AL M AR K E TS AN D TR E AS U R Y f r o m
Emirates NBD Equity Reverse Convertibles*
Coupon to Investor (p.a)
Investment Tenor
Underlying Stock CCY Current Price / Strike 3M 6M 1 year
Aldar Properties AED 1.06 5.03% 11.98% N.A.
Abu Dhabi National Energy Co. (TAQA) AED 1.17 3.73% 7.33% N.A.
Arabtec Holding Co. AED 1.31 4.67% 10.97% N.A.
Emaar Properties PJSC AED 2.57 4.36% 10.84% N.A.
Aramex AED 1.80 3.97% 8.85% N.A.
Sorouh Real Estate Co. AED 0.98 4.78% 14.76% N.A.
Abu Dhabi Commercial Bank AED 2.87 4.41% 7.56% N.A.
Saudi Basic Industries Corp. SAR 91.63 4.06% 7.53% N.A.
* As of 12 October 2011 Please note, all prices above are indicative and subject to internal approvals.
What is a Reverse Convertible?
A Reverse Convertible is a structured product which allows the investor to benefit from a high return based on the view that the
underlying will not decline below its initial level.
Mechanism
At maturity, there are 2 scenarios:
- If the underlying closes at or above its initial level, then investor receives 100% of the capital invested and the coupon
- If the underlying closes at or below its initial level, then investor receives 100% of the capital invested and the coupon
minus the negative performance of the underlying from initial level. In this scenario, investor may incur capital loss.
Scenario analysis (ex: Aldar Reverse Convertible on 6 months):
- If Aldar is above its initial level in 6 months, then investor receives 100% + 11.98% = 111.98% of the capital
invested
- If Aldar declined by -5% from the initial level in 6 months, then investor receives 100% + 11.98% – 5% =
106.98% of the capital invested
- If Aldar declined by -30% from the initial level in 6 months, then investor receives 100% + 11.98% – 30% =
81.98% of the capital invested
Source: Emirates NBD Sales & Structuring.
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G L O B AL M AR K E TS AN D TR E AS U R Y f r o m
Emirates NBD Research & Treasury Contact List
Emirates NBD Head Office
12th Floor
Baniyas Road, Deira
PO Box 777
Dubai
John Eldredge Tim Fox
GM - Global Markets & Treasury Head of Research & Chief Economist
+971.4.6093001 +971.4.2307800
[email protected] [email protected]
Research
Khatija Haque Nick Stadtmiller Aditya Pugalia
GCC Economist Fixed Income Analyst
Research Analyst
+971.4.2307801 +971.4.2307804 +971.4.2307802
[email protected] [email protected] [email protected]
Irfan Ellam
Head of MENA Equity Research
+971.4.2307807
Sales & Structuring +971.4.2307777
Sajjid Sadiq Sayed Shubhi Gupta Pinto Khalid Tazeem
[email protected] [email protected] [email protected]
Fardaous Chekili Jackson Michael Noor Al Sulaiman
[email protected] [email protected] [email protected]
Overseas Sales
Kingdom of Saudi Arabia Singapore
Numair Attiyah Supriyakumar Sakhalkar
+9661.2011111 +65.65785628
Extension - 2125 [email protected]
Group Corporate Communications
Ibrahim Sowaidan Claire Andrea
+971.4.6094113 +971.4.6094143
ENBD Research 25
G L O B AL M AR K E TS AN D TR E AS U R Y f r o m
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