Last weekend King Salman of Saudi Arabia put out a royal decree which has rescinded salary cuts and reinstated bonus payments to thousands of civil servants; around two thirds of the population work for the state. The official line was that the reinstatement reflects an improved fiscal position with the deputy economy minister, Mohammad al-Tuwaijri, saying the first quarter deficit was SAR26bn against projections of SAR54bn. The salary cuts are estimated to have saved SAR36-40bn since last October.
This weekend marks 100 days of the Trump presidency, or as the latest Simpsons parody referenced it “we are 6.8% of the way home”. Often considered an important period for getting things done before election goodwill and hype fade, and campaigning for midterms begins to distract concerned politicians. But perhaps this expectation is exaggerated, especially when held up to standard Franklin D Roosevelt set in pushing through his ‘New Deal’ in the midst of the Great Depression and strong opposition from Republicans and corporations.
Stocks, particularly the technology sector and small-caps, continue their optimism fuelled rally with the NASDAQ surpassing 6,000 for the first time on Tuesday: double the level from four years ago. Much of the broader gains can be attributed to the recent waning of global political angst and further risk-on trades as the VIX retreats to near-decade-lows and the US dollar Index (DXY) hovers around the 99.0 level. But the outperformance of growth stocks likely stems from lower expectations for both inflation and broader economic growth in the face of a floundering Trump administration.
In 2009 Malaysian PM Najib Razak established Malaysia’s sovereign wealth fund, 1Malaysia Development Berhad (1MDB), with the intention to fund economic development projects within the country. However all number of corruption probes and fund misappropriation scandals have plagued the state fund with the US Department of Justice (DoJ) claiming that at least USD 3.5bn of raised funds have been ‘stolen’. To add to the troubles, a year ago 1MDB missed a USD 50m coupon payment thus ‘defaulted’ on a USD 1.75bn bond issued on 2012.
For the first time in over 50 years, a mainstream party candidate has not made the run-off in the French presidential election. Independent candidates Emmanuel Macron and Marine Le Pen will now fight for the presidency. In the final count centrist Macron polled 23.75% of the vote with far right candidate Le Pen coming just behind on 21.53% of the vote. After the results were announced, Conservative candidate François Fillon, who polled fewer than 20% of the vote, backed Macron for the presidency, saying there was no choice but to vote against the far right.
Perhaps after the recent US healthcare reform debacle the realities of political office versus campaign rhetoric are hitting home for Donald Trump as his stance seems, for the moment at least, to be softening on a number of issues. He has repeatedly denounced NAFTA, the North American Free Trade Agreement, branding it a ‘disaster’, and threatened to withdraw from it without meaningful changes being agreed with Mexico and Canada. These comments and the withdrawal of the US from the Trans Pacific Partnership (TPP) earlier this year have seen forecasters elevate protectionism to a key risk to the global outlook.
Earlier this week the International Monetary Fund revised up its forecast for UK growth. This is the second time in 3 months that the IMF has upgraded its forecast for the UK economy after conceding that its performance since the vote to leave the EU has been much stronger-than-expected. The upgraded outlook now suggests the UK will grow by 2% in 2017, second only to the US as the fastest growing advanced economy. In a note after the upgrade the IMF stated that growth ‘remained solid in the UK, where spending proved resilient in the aftermath of the June 2016 referendum in favour of leaving the European Union’.
In what has otherwise been a fairly quiet news week, focus today remains on UK politics and the potential effects of an early general election, as well as news that George Osborne will be quitting Parliament to focus on his new roles at the Evening Standard and Blackrock. At the time of writing sterling has remained strong, and at 1.2850 against the dollar is near 200-day highs. This has taken its toll on the FTSE 100, which at below 7,150 is -2.5% off the pre snap-election announcement.
Regular readers will recall a couple weeks ago we wrote a daily on the ‘impending’ Saudi (KSA) sukuk issue; it was launched last week. The huge $9bn deal consisting of 5-year and 10-year tranches was issued at spreads of 100bps and 140bps over mid-swaps and yields of 2.894% and 3.628%, respectively. As we are value investors we did not add either tranche to our portfolios as the A1 rated paper did not offer enough in terms of return and credit cushion relative to the Saudi Government international bonds we already hold.
The initial round of the French Presidential election on 23 April is rapidly approaching and it is increasingly looking like it will be a nail-biter right until the final run-off between the two leading candidates on May 7. Polls suggest the contest still remains open between four candidates: According to the Kantar Sofres poll at the start of the week Emmanuel Macron and Marine Le Pen lead with 24 percent of the vote and are followed by Jean-Luc Mélenchon who has been gaining ground with 18 percent of the vote. He is now ahead of François Fillon with 17 percent of the vote; plus Fillon continues to fight yet more allegations that he put his wife on the payroll 4 years earlier than he had claimed.
Yesterday, markets continued to move more in favour of risk-off assets in response to rising geopolitical worries and perhaps declining market optimism. At time of writing, yields are at 2017 lows for US Treasuries beyond 7-year maturities. Likewise gold returned to $1,275 nearing November pre-Trump election levels, the Japanese yen dipped back below 110 to the US dollar, and Brent crude furthered its rally to the $56 level having hovered at for most of the first quarter of 2017.
Away from the pre-banquet US airstrike attack on Syria, according to Chinese newswires the meeting between Chinese President Xi Jinping and US President Donal Trump was ‘a great success’. It went so well that Xi said the two ‘got deeply acquainted, established a kind of trust and built an initial working relationship and friendship’. In a memo after the ‘outstanding’ ‘relationship’ had been ‘developed’, Trump gushed at how he believes ‘lots of very potentially bad problems will be going away.’ This probably hushed a number of reporters, who were angling for all manner of disruptive and ‘very difficult’ talks.
As our very own Boris Johnson cancels his trip to Moscow, focus will be on Japan’s Premier Abe and his Russian visit later this month. Expectations are that high on the list of business will be the prospect for a new gas pipeline between the two countries to supply the world’s largest importer of Liquid Natural Gas.
Unfortunately, Russia’s Gazprom PJSC is not that confident on the outlook for Japanese future gas demand to warrant the outlay involved.
On Wednesday evening we had a glimpse of the FOMC’s recent thoughts via the release of the 15th March minute s. Some of the comments are particularly interesting such as: 'some participants viewed equity prices as quite high relative to standard valuation measures', and also 'prices of other risk assets, such as emerging market stocks, high yield corporate bonds, and commercial real estate, had also risen significantly in recent months'. The fact that these specific asset classes were mentioned in the minutes indicates that the Fed is clearly aware of the stretched pricing in certain classes.
Newswires suggest that the government of Saudi Arabia could issue a sukuk, or Islamic, sharia-compliant bond as soon as next week. The sukuk market is based around issuing securities that while they may have the same cash flows as Western bonds would, they do not legally pay interest but instead pay based on profit shares. Having peaked in 2012, last year the sukuk market picked up steam; according to sources 2016 saw an increase in over 13% of issuance globally, to ~USD75bn, of which over 60% are issued by corporates.
Last week the New York Federal Reserve released their quarterly report on US ‘Household Debt and Credit’. US household debt rose to $12.58tn, with increases in credit card, auto, student and housing loans. This represented a 1.8% increase from the previous quarter and after gradually rising over recent years is now back to 2008 levels in absolute terms. In 2016 US households borrowed a further $460bn in aggregate. On its own this figure is hardly a warning signal, especially as household debts as a percentage of GDP remain well below the ~90% levels of 2008.
After a 12 year ban on new projects, Qatar Petroleum is to start a new natural gas project in the so-called North Field, Southern section, which they expect to have capacity of 2 billion cubic feet per day, which is the equivalence of 400,000 barrels of oil a day; this should come on-stream in around five years’ time.
The North Field and connected South Pars, which is shared with Iran, is the world’s largest reservoir of non-associated gas and Qatar Petroleum is the world’s top exporter of Liquefied Natural Gas (LNG).
According to a report from the International Energy Agency (IEA), global emissions from the world’s energy sector were just over 32bln tonnes in 2016, the same figure as the previous two years, despite the global economy growing 3.1%. Although it’s too soon to be certain, they say there are encouraging signs of growth in the renewable energy sector as well as a shift from coal to natural gas. The biggest surprise was in the US, with carbon dioxide emissions falling 3%, meaning that US emissions are at their lowest level since 1992, whilst the economy has grown over 80%.
Over the course of the week a number of Fed speakers have taken to the wires. Perhaps one of the more interesting speeches was from William Dudley, the New York Fed President, who spoke yesterday on ‘The importance of Financial Conditions in the Conduct of Monetary policy.’ This is of interest as while the Fed has increased the Fed Funds Rate by a total of 50 bps since December 2016 ‘financial conditions’ in the marketplace have eased to offset this. For Dudley there are ‘five key measures: short- and long-term Treasury rates, credit spreads, the foreign exchange value of the dollar, and equity prices.’ For example, the US Dollar Index has retraced close to half the gains made since the election of Donald Trump.
Today we have to credit our good friend Mr Andrew Main for the daily which we hope you enjoy, the alternative was to review Brexit, but we thought a well-earned rest from that subject was deserved.
I read the outline of a recent study by the New World Wealth Report from South Africa which pointed out in the last year some 82,000 millionaires had moved their residency.
We are used to seeing the pictures of fleeing refugees moving countries but do we ever think about the effects of millionaires moving.