The Weekly Update

The big number this week is of course US Non-Farm Payrolls on Friday with +175k expected for the headline number, a stable 4.7% unemployment rate, and a small increase in average hourly earnings to 0.3% from 0.2% previously which is an actual decrease in the year-on-year rate of 2.7% from 2.8%. We also have minutes from the FOMC and ECB on Wednesday and Thursday. Across the globe we have the PMI numbers with Europe starting today along with the US manufacturing number, ending with the week with China’s and India’s on Thursday. Other data includes US Durable goods and European retail sales.

In Asia we have a few holidays as China has ‘tomb sweeping’ today and Hong Kong has a day out tomorrow. Japan released their Tankan this morning which showed some improvement of small and large manufacturers, and Friday we have a mass of Asian central banks announcing their reserves.

In Latam Brazil’s inflation numbers and Industrial production could be of interest as will be México’s CPI and Leading Index but as usual their relative currency swings may be the focus for the market.

Of course the Trump / Xi meeting will be of interest Thursday and Friday and we expect more of the same from FOMC speakers as they all seem to be talking from the same hymn sheet at the moment to a lesser or slightly more aggressive degree. ECB president Draghi is also speaking in Frankfurt which will be eagerly awaited for any further clues on his tapering plans.

In our bonds we would expect relative calm until we see Friday’s NFP report although we still need to keep one eye on the US stock market. Friday will give us more insight into how the economy is ending the 1st quarter and will set the tone for the coming week or so with the market maintaining a much lower trajectory for rate increases, which we agree with, than the FED’s own ‘dot plot path’.

The Green Bond market has really taken off over the past couple years and according to Moody’s just last year the market rose 120%; boosted by Chinese issuers, particularly Chinese banks, in their fight to reduce pollution across the country. Issued with an intention to fund environmental projects, corporates, banks and supranationals have been issuing these tax-exempt bonds, which now account for over USD 200bn total issuance; although still a tiny proportion (~1.5%) of total global debt to plough into climate changing projects; if we consider the growing impetus of the Paris Agreement.

Last week the National Bank of Abu Dhabi (NBAD), Abu Dhabi’s largest lending bank and the UAE’s second largest, issued the GCC’s first ever ‘Green Bond’. Abu Dhabi holds ~6% of the world's oil reserves, and its hydrocarbon industry generates ~80% of the government's revenues and accounts for over half of the nation's GDP. The government has therefore taken steps since 2015 to diversify the economy away from the hydrocarbon complex into lending, investing and facilitating renewable energy projects ‘focused on environmentally sustainable activities’, NBAD said. According to the head of sustainable business banking at NBAD, Nathan Weatherstone, there is ‘approximately $640bn of investment required for renewable energy projects across the West-East Corridor’. The new NBAD 5-year USD 587m Green deal is just a drop in the ocean, but a step towards achieving a goal of reducing oil energy reliance.

Rated Aa3, just one notch below that of the Emirate, the 3% 2022 bond was issued at a spread of 109.10bps over Treasuries, we calculated that the expected return, if the bond were to reach fair value would be 2.2%, with a yield just under 3% and ~3 notches of spread cushion. According to sources, the deal was just under 2x oversubscribed, with Middle Eastern banks and funds accounting for ~27% of the issue; while European institutions bagged 50% of the deal. We did not enter into the deal as we have chosen not to hold GCC banks for the time being, and we feel better value lies with, for example China’s state-owned oil company CNOOC’s bonds. The CNOOC 3.8775% 2022 issue currently trades ~55 bps over what we deem is fair value for similar bonds, this implies an expected return and yield of 5.5% for the Aa3 rated issue, which is comfortably over 3 credit notches cheap.

On Wednesday last week, after 9 months of waiting, the Brexit referendum has finally given birth to Article 50. In a sign of the times, the President of the European Council Donald Tusk notified the world of his receipt of the official letter via twitter a few minutes before 12:30 GMT. Prime Minister Theresa May then addressed the House of Commons calling the occasion a ‘great turning points in Britain’s history’; meanwhile Tusk opened his address stating ‘There is no reason to pretend this is a happy day, neither in Brussels nor in London,’ and concluded with ‘we already miss you’. The letter and accompanying speech remained clear in pursuing a hard Brexit, stating ‘Because European Leaders have said many times that we cannot ‘cherry pick’ and remain members of the Single Market without accepting the four freedoms that are indivisible. We respect that position. And as accepting those freedoms is incompatible with the democratically expressed will of the British People, we will no longer be members of the Single Market.’

Anecdotally the pen used to sign the agreement was a Parker Duofold: from a US company that used to manufacture in the UK but moved production to France in 2011. One hopes this is not a portent of Brexit causing other UK businesses to go the same way. The only real unambiguous consequence of today is that it is indeed a “historic moment from which there can be no turning back”. In two years we will begin to see whether this new uphill struggle leads the UK to the new heights of “A Truly Global Britain” or straight off a precipice.

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