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Connecting the dots

June 2016

Market focus this month will likely be on the UK opinion poll results and the Fed statement. The rising US dollar however could hit commodity prices

Dollar to resume strengthening
Global markets continue to be heavily influenced by what the Fed says and does. This is particularly true for equity markets and currencies. After a dovish start to the year, Fed rhetoric has turned more hawkish recently. Many still expect a very gradual hiking cycle, and with it limited USD appreciation. The US dollar has depreciated largely since the start of the year as markets priced in a more dovish Fed. But Fed officials recently broke this mood by strongly insisting that June remains a “live” meeting, says BofA Merrill Lynch in a report. The US dollar is expected to currency to resume strengthening as the rate hike rhetoric intensifies.

Commodities Gather Steam
Commodities extended March’s Bull Run into April reaching YTD highs. A more dovish tone at the Fed and constructive views on oil softened the outlook on commodities, allowing them to bounce back to positive territory. Despite abundant supply and slowing global industrial demand, by the end of April, the Reuters/Jeffries CRB index climbed 4.8% YTD, standing at 184.6. Industrial and precious metals rebounded on improving sentiments and a weakening USD. In addition, the demand boost received by copper can also be traced to China’s record stockpiling, according to a monthly report by Saudi Arabia’s National Commercial Bank (NCB). Agricultural commodities are expected to see a modest price recovery from last year as global demand strengthens. The Goldman Sachs Agricultural index stood at 305 by the end of April, an upturn of 7.6% YTD.

Gold support above $1,200 level
Intensified financial speculation largely attributed to the British Euro exit referendum provided support for the yellow metal which ended April 21.9% higher YTD, standing at USD1,294.1/oz. Support above the USD1,200 level should remain throughout the year as the adoption of negative interest rates by many central banks, namely the BoJ and the ECB, should increase the attractiveness of gold as a hedge against the depreciation of financial assets. On the other hand, rising interest rates in the US during the second half of the year hold negative implications for gold as investors will seek to hold yield-bearing assets, NCB report added.

DM sovereign bonds’ higher yield
Increasing prospect of a Fed rate hike in June / July is causing most DM (developed markets) sovereign bond indices, barring Eurozone, to record higher yield and lower prices. However, investment grade corporate bonds are suffering in tandem, Emirates NBD Global Markets & Treasury says in a report. Primary market issuance has been robust not just in the GCC but across the global financial markets. In the GCC the biggest news in the last week of May was the jumbo $9bn bond deal by Qatar sovereign in 5 yr, 7yr and 30 yr tranches. New issue pipeline is robust with at least eight issuers either considering or already on the roadshow including Qatar, SA, Kuwait, Emirates Islamic, Noor, DP World, Qtel, EA Partners etc. Year to date issuance, excluding privately placed deals, has reached around USD 12bn and at this pace will likely cross USD 40bn this year, Emirates NBD report said.

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