Macro Strategy and Economic Updates

The fed fund futures market is currently pricing in 100bps of rate cuts by the end of this year, a degree of implied easing that, in the context of current macroeconomic metrics, we believe to be overdone. Moreover, a further four 25bp rate reductions are then priced in by the end of 2025. In this latest update to our Global Rates Outlook, we set out not only our thoughts on USD and GCC rates going forward, but also probe into the outlooks for the European Central Bank, the Bank of England and the Bank of Japan.

In this report FAB’s Market Insights & Strategy team provide a snapshot of the Gulf Cooperation Council (GCC) from a macro-economic perspective, our current outlook for the oil market, and a summary of FAB’s MENA FX and rates capabilities.

Our latest Macro Strategy publication in which we update Global Rates and GCC Macro outlooks for 2022.

In this report FAB’s Market Insights & Strategy team provide a simple overview of the Gulf Cooperation Council (GCC) from a macro and markets perspective. The report covers a macroeconomic snapshot of the region, our outlook on the GCC economy and oil market, and a summary of the GCC FX and rates market.

The positive macroeconomic diversification story of the United Arab Emirates moved to a new chapter this week as the government announced on September 5 its latest strategy to stimulate the domestic economy. Entitled ‘Projects of the 50’ to commemorate the 50th anniversary of the country in December this year, the government will embark on a series of stimulatory investments and also aim to ease residency rules for expats, all of which is designed to build the country’s status as a global hub for business and finance.

Back in Q4 2020 the global macro outlook for 2021 was generally founded on cautious optimism. Rates were anchored, the fiscal policy sluice gates were wide open, particularly so in the wake of President Biden’s election and the Covid-19 vaccination drive was well underway. Since then, financial markets have largely continued to price in a brightening horizon, notwithstanding a few road bumps and obstacles to risk asset sentiment along the way. There is still reason for optimism today, but perhaps not to the extent that the world was holding its breath for back in late 2020.

The buffeting headwinds and tailwinds of the current turbulent global macroeconomic landscape continue to fuel reassessment of the global interest rate outlook. In this respect, please find our latest analysis and outlook for global rates, entitled ‘Bearing All’.

Our latest macro strategy analysis in which we offer a preview of today’s U.K. Budget that will be delivered by Chancellor Sunak to the House of Commons.

Our latest macroeconomic analysis in which we discuss some of the key takeaways from this week’s (virtual) Davos 2021 symposium.

Our latest macroeconomic analysis in which we discuss some of the key macroeconomic risks facing global markets in 2021.

Our latest macro strategy publication in which we present our FAB House View of the Global Rates Outlook for 2021.

Our latest FAB Macro Strategy report in which we present an update on the Brexit situation. Amid all the focus on Covid-19 around the globe, we almost seem to have lost sight of what appears to increasingly be a Brexit cliff edge on December 31.

Our latest macro strategy publication entitled ‘Seeing Red’ in which we revisit and revise our 2020 GDP growth forecasts and outlook for the United Arab Emirates and the Kingdom of Saudi Arabia.

With the global economy having been floored by COVID-19 over the past few months there is now much debate and argument as to whether the trajectory of the aspirational global economic recovery over the coming months might be ‘V-‘ or ‘U-‘shaped in nature, or indeed some other letter. In our latest macroeconomic strategy piece we analyze the prospects for such recovery post Covid-19

In light of the huge market moves seen overnight, led predominantly by the sell off in oil post Saudi Arabia's announcement of an increase in supply, and resultant correction across various asset classes globally, please find attached our initial read of the situation..

The global macro environment of the past 5 years, in the post sovereign debt crisis era, has seen a seismic shift in financial market dynamics, especially in the Eurozone as a result of central bank intervention. In this paper we explore the current and deepening metrics surrounding negative bond yields, and whether this is now a ticking time-bomb.

In this report we provide our thoughts on the potential implications of the Coronavirus on the global economy and markets. Please read on.

While the macro spotlight was firmly on the shifting sands of monetary policy last year as the Federal Reserve cut rates three times, as well as on U.S./China trade tensions and the subsequent cuts to global growth forecasts for 2019 and 2020, we herewith now offer what we believe may be global markets’ Top 10 Macro Challenges for 2020. This list is not exhaustive by any means, but is designed to be thought-provoking as investors finalise their investment strategies for the New Year.

We have long held the view that given the split, divisive nature of the Brexit polemic that a hard, no-deal result would likely be the only feasible outcome. We see no way for a compromise to be achieved in time and of late, with the installation of the new Boris Johnson pro-Brexit administration, the market seems to be increasingly in agreement with us.

In the context of recent market volatility, the traders within FAB’s Global Markets team have provided their views and insights on interest rates, yield curves, currencies and oil.

With Boris Johnson having won the keys to No.10 Downing Street and the phrase ‘hard, no-deal Brexit’ being used by him and many of his government ministers, the market is now waking up to reality. We maintain our long-held view that a ‘hard Brexit’ will be the most likely outcome to the polemic, a scenario that GBP has not priced in.

Our latest update on FAB’s ‘House View’ on U.S., Eurozone and U.K. interest rates. For each central bank (Fed, ECB and BOE) we discuss current macroeconomic conditions, challenges and opportunities facing policy makers and set out our 12-month outlook expectations for rates.

Our current ‘house view’ on the oil market : Despite the sharp drop in Iranian and Venezuelan exports, global producers are still able to pump enough extra crude to prevent the market from breaking sharply higher in the near term. Equally, better coordinated action by the OPEC/NOPEC countries and the formalization of an ‘OPEC+’ structure, combined with steady demand growth should continue to ensure that a dramatic drop in prices will also be avoided. Thus we maintain our view, which was first expressed in January this year that crude prices should average US$60 (WTI) and US$70 (Brent) in 2019.

Our newly inaugurated publication, First Abu Dhabi Bank’s ‘house view’ on U.S., Eurozone and U.K. interest rates. For each central bank (Fed, ECB and BOE) we discuss current macroeconomic conditions, challenges and opportunities facing policy makers and set out our 12-month outlook expectations for rates.

In this report FAB’s Market Insights & Strategy team provide a very simple overview of the Gulf Cooperation Council (GCC) from a macro and markets perspective. The report covers an economic snapshot of the region, our outlook on oil, and a summary of the GCC FX and rates market.

In the context of recent concerns about Oman’s economic and fiscal situation, please find attached our latest analysis of the Sultanate along with an overview of the sovereign’s economy, debt burden, and its plans for reform. Overall, we believe the bearish sentiment on the Oman story is somewhat overdone and feel that comparisons to the Bahrain ‘crisis’ last year are wide of the mark.

The GCC fixed income market has experienced a solid start to 2019, both in terms of primary and secondary market performance. We expect this trend to continue as global macro uncertainties further highlight and enhance the relative value appeal of the GCC asset class’ strong underlying fundamentals, making an interesting and compelling case for continued capital investment flows in favour of this region and asset class.

Our suggestions on which potentially major geopolitical and market related risks investors should be keeping an eye on in 2019.

Ahead of the FOMC’s December rate decision , Simon Ballard, FAB Macro Strategist spoke to CNBC about his current outlook for U.S. monetary policy and that of the broader global macroeconomic situation.

The Brexit process, or lack thereof, in the U.K. is currently raising more questions among investors than it is answering. What we do know is that the U.K. will exit the EU on March 29th 2019, with or without a ‘deal’. If there is a ‘deal’ then a two year transition period will follow for settling all the minutiae. With the deadline for reaching a deal between Westminster and Brussels – the need to agree terms on the future trading, economic and political relationship between the two regions – becoming ever closer, investors want clarity. In this latest research paper, we attempt to offer some answers to investors’ current concerns and questions over Brexit, as well as to offer some clarity on where the Brexit story and the direction of U.K. risk sentiment may go from here.

Further to our analysis of the UAE real estate market entitled ‘Foundations of Optimism’ published back in April, we have recently reviewed 1H 2018 data. While the direction of travel for residential and commercial property (sales and rental) prices in 2018 remains downward, data suggests that the pace of weakening is steadily slowing. Therefore, while the regional macro backdrop is improving, the sentiment toward UAE real estate seems set to remain selectively optimistic. We believe that property prices and yields may still have room to weaken further with supply the greatest threat to sector performance, but the latest data does suggest that the pace of decline is slowing.

The direction of the oil price tends to be correlated to underlying macroeconomic conditions. Indeed, U.S. inflation data and the oil price over the past 13 years have shown visible positive correlation. However, this positive correlation has weakened and turned negative over the past couple of months, a potential warning sign of either of a near-term reversal in economic growth optimism or renewed upside in the oil price. In this analysis, we consider both scenarios and the ramifications they carry for MENA/GCC markets.

The shape of a yield curve has traditionally been viewed as a reflection of the macro outlook for that particular economy. An upward sloping, positive yield curve, where long-end rates exceed front end yields, suggests positive economic growth, improving economic conditions and rising future inflation expectations. Conversely, a flat – or even inverted – yield curve where long-end rates offer little, if any, premium, over short-dated yields is generally seen as reflecting overly tight monetary conditions and consequently is often seen as a precursor to recessionary risk.

The past 12 months have seen crude maintain its bullish mood and this was underlined when Brent tested the US$80 a barrel mark in May this year. Admittedly we have seen a minor technical retracement since then, but the fundamental and geopolitical environment overall still appears supportive for prices going forward. In this report we discuss how much further potential upside is possible in the near to medium term and what factors, both bullish and bearish should one keep an eye.

While risk pricing across the three entities of the German sovereign, Volkswagen and Porsche CDS contracts may have all enjoyed the same direction of travel through much of last year, the relative relationship has been significantly different over the first 6 months of 2018. As a result, investors in German risk will have been rewarded for a much more discerning approach to risk/reward dynamics this year. For those that now anticipate deeper deterioration in the VW scandal or the German political outlook over the coming months, we would suggest monitoring the Porsche 5Y CDS contract and its potential to play catch up.

With Bahrain’s current fiscal situation under the media spotlight recently, we conducted an analysis of the issue and conclude that the economic picture may not be as bad as it appears on the surface.

In this report FAB’s Market Insights & Strategy team provide a very simple overview of the Gulf Cooperation Council (GCC) from a macro and markets perspective. The report covers an economic snapshot of the region, our outlook on oil, and a summary of the GCC FX and rates market.

European Purchasing Managers’ Index (PMI) data released Wednesday (May 2) should serve as a useful reminder as to where embedded European macroeconomic risks lie. The numbers highlight to us those geographies in the sovereign spectrum that may have enjoyed the greatest benefit of monetary repression, and as such may now be at greatest risk of price corrections over the coming months. Furthermore, data released Thursday for UAE and Saudi Arabia PMIs, would seem to highlight the relative inherent strength of GCC credit when compared alongside Europe.

In our latest review of UAE real estate, “Foundations for Optimism” we find that a soft, but nonetheless cautiously optimistic tone continues to characterize the UAE property market. After the correction seen in real estate prices during 2014/2015 the market is now showing some encouraging signs of underlying price support, although with evidence of extensive incentives being used by landlords to retain incumbent tenants or entice new ones, market conditions are still far from strong.

Our latest macro strategy missive, in which we analyse and discuss the recent political developments in the U.S. alongside the OECD’s update of its global growth projections.

ECB president Draghi, ever the wordsmith, now needs to tread a very delicate line between conveying the idea of sustainable Eurozone growth and scaring investors with an overly optimistic and hawkish rhetoric. The market hope is now that he shows a conviction in a Goldilocks Eurozone economy that is now running neither ‘too hot’ nor ‘too cold’.

This evening’s FOMC rate announcement in the U.S. will be Janet Yellen’s last as Fed Chair. She will not want to shock the market before leaving office and Fed funds futures pricing suggests minimal chance of a rate move. Far more important will be the tone of Yellen’s accompanying statement and it is this that the bond market will make any reaction to, in the context of an already higher bias to the U.S. yield curve.

Our 2018 guide to the Middle East and African currency markets including FAB’s capabilities in each.

The annual 4-day World Economic Forum (WEF) begins in Davos-Klosters, Switzerland tomorrow (January 23) and investors will be watching carefully for market-moving headlines. With India’s Prime Minister Modi and US President Trump expected to book-end the proceedings, and with a diverse range of debates in between, there should be plenty to interest the market. In this brief overview we highlight what we believe will be the key areas to watch.

Global financial markets are facing a potentially more challenging environment in 2018/2019 as central banks begin to pare back monetary and fiscal stimulus and embark on the (hopefully gradual) process of balance sheet normalization. The velocity of this normalization process will be key to how global markets react. To avoid adverse reaction across the risk asset space, central banks need to convey ‘dovish tightening strategies’. Time will tell.