While a couple of participants preferred a 50bps cut there were also several participants who favoured ‘maintaining the same rate’. Thus, the minutes offered little for the doves and continued to frustrate and drive Trump to twitter again overnight as he continues to see a Fed falling short of his suggested of 100bps of cuts over a ‘fairly short period of time… with perhaps some quantitative easing as well’.
A lot of our favoured sovereign and quasi-sovereign Eurobonds from the GCC have been strong performers over the past 18 months; this is despite ratings downgrades resulting from their high dependency on oil prices and weakened sovereign credit profiles due to deteriorating current account and fiscal balances, along with increased government debt levels. This most likely reflects that a lot of the issues were already trading several credit notches cheaper than their rating warranted, that their credit profiles although weakened are still robust and the continued search for yield across fixed income markets.
Yesterday, at the 172nd OPEC meeting in Vienna, OPEC and some key non-OPEC countries announced the extension of production cuts for 9 months through to 31 March 2018. The earlier agreement had looked for a 1.8 mb/d reduction in production. Khalid Al-Falih, the Saudi Energy Minister, noted that oil inventories are expected to fall below five-year averages before the end of the year but as Q1 is seasonally weak it made sense to push the cuts out until the end of March. Little was said in terms of an exit strategy other than the situation will be reviewed at the end of November and into 2018. Brent crude sold off on the back of this news trading around USD51.75 per barrel the time of writing but oil had rallied strongly ahead of the meeting already factoring in a lot of upside and the announcement did not exceed expectations.
Saudi Arabia’s bond issuance program has got off to a good start; a local issue of SAR 20bn (USD5.3bn) was recently sold to local banks and institutions following an issue of SAR 15bn in bonds in a private placement to institutions in June. These are the first notable bond issues since 2007 reflecting an increase in its budget deficit due to lower crude prices. Up to this point Saudi Arabia had been using its sizeable foreign exchange reserves to sustain government spending. As at the end of June foreign exchange reserves were USD672bn; this is down from a high of USD746bn in August 2014, or what was then approaching 100 percent of 2014 nominal GDP.