The Weekly Update

A relatively quiet week on the data front saw market sentiment driven mostly by central bank rhetoric and politics.  The yield on the 10-year US Treasury was marginally lower over the week at 2.14%, and the dollar relatively unchanged. The big story was oil’s fall to year lows during the week; crude prices did however pare losses and stabilised towards the end of the week; with Brent closing at $45.54pb, down 3.86% over the week.

Other big news last week was Saudi Arabia’s list of 13 demands presented to Qatar including: cutting alleged ties with Iran, shutting down Al-Jazeera and other state sponsored news outlets and cutting military ties with Turkey, amongst others. Having been given ten days to comply, Qatar’s foreign minister rejected the terms over the weekend stating that the conditions had ‘nothing to do with combating terrorism’, rather ‘limiting Qatar's sovereignty, and outsourcing our foreign policy’. However, this does not mean that Qatar is not open to discuss the conditions, with US Secretary of State Rex Tillerson stating that Qatar will find it ‘very difficult’ to fully comply, but that there are ‘significant areas which provide a basis for ongoing dialogue leading to a resolution’. The US has also stated its willingness to assist in mediation efforts with the Emir of Kuwait to lead to a resolution. We will continue to monitor the situation as it unfolds, with GCC nations celebrating the Eid holidays pricing on the bonds will be limited during the first half of the week.

Elsewhere, US Fed members discussed inflation expectations, and thus monetary policy and balance sheet tightening. A dovish Bullard highlighted the Fed’s projected Fed-funds rate at 3% over the next 2.5 years is ‘unnecessarily aggressive’, adding that benign inflation concerns are warranted. He believes that the shrinking of the balance sheet should ‘start sooner rather than later’; with an announcement expected in September. San Fran President Williams stated this unwind will commence later this year but that a ‘baby step’ approach should be adopted. Meanwhile 34 of the largest US banks passed initial Fed stress tests. Speaking in front of the Banking Senate Committee, Fed governor Powell said the central bank should ‘assess whether we can adjust regulation in common-sense ways that will simplify rules and reduce unnecessary regulatory burden without compromising safety and soundness’. The second round of stress tests will be conducted this Wednesday where we should get an idea of the size of dividends and share buybacks expected from these US banks .

Staying with the US, economic data releases continued to disappoint with June preliminary PMI forecasts, for example, missing expectations. This week there are a number of key economic data releases including the Chicago Fed National Activity Index print for May; expected at 0.2 from 0.49 previously. This will be followed by the final Q1’17 GDP qoq and Core PCE qoq releases. The week, and month, will end with Fed’s favoured inflation indicator, the PCE core, which is expected to come at 0% mom and 1.4% yoy. Should be interesting to hear what Fed members have to say about the expected softer numbers ahead of the releases.

Elsewhere, MSCI Inc. announced China A-shares inclusion in its world renowned MSCI Emerging Markets Index, from June 2018. Although China will initially represent a modest ~0.73% weight within the indices - this is expected to grow - it is another stride on the road to internationalising the renminbi and integrating China further into the global financial system. Last week was a pretty quiet one on the data front in China, this week will see the industrial profits released for May, on Tuesday and official and Caixin PMI prints at the end of the week.