The broader risk-on sentiment last week saw the S&P Index rally to new all-time highs, while the VIX Index, a measure of volatility traded below 10 through the week and closed at new lows on Thursday. The tone was driven by stronger US data and further hawkish comments from Fed members including: the pencilling in of a December hike and more positive outlook on US inflation (albeit it still below 2%), off the back of stronger growth. Employment numbers for September were not expected to rock the boat on Friday, due to the divergence of estimates resulting from the hurricane disruptions. However, despite the non-farm payroll figure actually coming in at -33k, unemployment upwardly surprised at 4.2% (from 4.4%) and average hourly earnings rose to 2.9% yoy. US Treasury yields spiked higher, to 2.4% off the ‘stronger’ report, however, simmered to 2.36% by close on Friday; after renewed US-North Korea tensions. Meanwhile, the dollar bounced 0.78%, measured by the DXY Index over the week. The probability of a hike in December climbed to 78.5% by the end of the week.
We expect a quiet start to this week as the US celebrates Columbus Day (equity markets are, however, open). Tuesday will see the Jolts Job openings (a constituent of GDP). On Wednesday the September FOMC minutes will be released; any change to rate hike forecasts will be of interest. PPI follows on Thursday and CPI readings out on Friday will grab some attention, as markets expect the yoy reading at 2.3% for September: driven by the pick-up oil prices, resulting from hurricane-damaged oil refineries. Retail sales estimates for September also appear more positive, compared with the disappointing August readings; the increase in motor vehicle purchases after damage to cars and trucks during the hurricanes to be a large driver of the positive numbers. The week will end on sentiment prints and business inventories. We could also hear more on the US tax proposal as the House passed a budget resolution last week, with a 219:206 majority vote. NAFTA talks will continue, with the fourth round expected to start on Wednesday. On Thursday Trump is scheduled to announce future policy on Iran; could be contentious given his previous comments regarding the current nuclear agreement. Fed chat will also be followed closely. Meanwhile, the IMF and World Bank will host their annual gathering to discuss matters including: economic development, finance and poverty.
Elsewhere, politics closer to home dominated newswires. The pro-Spain rally in Barcelona over the weekend saw the chances of a Catalonian independence declaration diminish. We expect to have more of an idea on the developments on Tuesday. Meanwhile, in the UK, PM May’s leadership came into question following her address at the Conservative Party Conference; infighting within the conservative party over the weekend has also put a strain on Brexit developments. Sterling suffered a ~2.5% fall against the dollar last week. Today will see the beginning of the fifth round of Brexit talks; this could be somewhat interesting after Germany and France warned that further clarity from the UK is required in order for negotiations to continue.
It was a quiet week for China with the country celebrating National Day holidays. This morning we saw the softer Caixin PMI composite and services readings for September, however, FX reserves bounced in September. The FDI yoy print later this week will be of interest as will the import and export data dump on Friday. Ahead of that the Chinese Communist Party’s 18th Central Committee will meet on Wednesday for the last time before the highly anticipated Party Congress, which kicks-off on October 18. Elsewhere in Asia, candidates running for Japan’s October 22 general election will officially kick-off their campaigns.
In terms of new issues, we added the 30-year Abu Dhabi sovereign bond: part of a three-tranche deal launched last week. Priced at a spread of 130bps over Treasuries, we calculated this Aa2 rated bond’s expected return and yield at ~17%, with over 4 notches of cushion. This is the first long-dated bond that the Kingdom has issued and as such, we saw significant demand for the deal; overall the USD10bn deal was 4 times oversubscribed. As the bond is rated investment grade by at least two rating agencies we expect it will be held across a number of indices. Not that that would influence us to hold such an issue, as we are not tied to any benchmarks, rather we have our own internal constraints which include limiting our investable universe to countries with NFA scorings of 3 and above. Abu Dhabi, for example, has a very high 7 star rating, and is investment grade; thus slots into our universe comfortably.
Also, last week, was the landmark meeting between Saudi Arabia’s King Salman bin Abdulaziz and Vladimir Putin; where everything from oil markets, investment and arms deals, to the Syrian war were discussed. The delegations penned $3bn worth of energy deals with the possibility of a collective $1bn energy investment fund and a $1bn Sibur plant in Saudi Arabia. Fostering friendship with Russia has become increasingly essential for Saudi Arabia given the increasing influence Russia has garnered across the Middle-East in recent years: not just through their involvement in the Syrian War but through a decade of actively building ties across the region. The talks should be an economic and political win for both players, furthering Russia’s strength in the region and bolstering Saudi Prince Mohammed’s “Vision 2030” economic transformation programme. Oil markets will be looking for any signals related to the crude production cut deal struck last December and news of extending the oil pact between the Saudi-led OPEC cartel and Russia.