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NBAD morning news summary (30-June-2016) Global News US consumer spending rises 0.4% in May after April’s revised 1.1% growth; inflation still benign as income growth cools: US consumer spending rose for a second straight month in May, but the rise slowed substantially after April’s biggest advance since August 2009 as American households realigned outlays with slower income growth. The Commerce Department said on Wednesday consumer spending, which accounts for more than two-thirds of US economic activity, increased 0.4% last month. Consumer spending in April was revised up to show it advancing 1.1% instead of the previously reported 1.0% jump. Last month's increase in consumer spending was in line with economists' expectations. When adjusted for inflation, consumer spending rose 0.3% last month after gaining 0.8% in April. Consumer spending rose at a 1.5% annual rate in the first quarter, holding down gross domestic product growth to a 1.1% pace. Despite the steady gains in consumer spending last month, inflation remained benign. The personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, rose 0.2% after a similar gain in April. In the 12 months through May the core PCE increased 1.6 percent after rising by the same margin in April. The core PCE is the Federal Reserve's preferred inflation measure and is running below the U.S. central bank's 2% target. Personal income rose 0.2% after advancing 0.5% in April. Wages and salaries gained 0.2%. Savings slipped to $730.6bn last month from $753.7bn in April. The saving rate eased to 5.3%, the lowest this year, from 5.4%. Source: Bloomberg; Reuters EU calls for ‘orderly’ Brexit, tells UK single market access requires full free movement: European Union leaders called for an orderly British withdrawal from the bloc to minimise instability and also delivered a tough message that London can access the bloc's lucrative single market only if it agrees to allow free movement for EU workers. As EU government chiefs took the historic step of meeting without one of the bloc’s members for the first time, they lamented the British decision to part ways then began to lay plans for a new union minus its second-largest economy. They also insisted that any negotiations on Britain’s future relationship wouldn’t be started until it gave official notification of departure. “There is a need to organise the withdrawal of the UK from the EU in an orderly fashion,” leaders of the 27 other nations said in a statement, according to Bloomberg News. Prime Minister David Cameron told EU leaders at his final summit with them on Tuesday that he believed the referendum was lost over the principle of unrestricted travel among EU citizens. But free movement of workers is one of "four freedoms" – along with movement of capital, goods and services – that the EU says must be maintained by any country that wants access to its common market. According to Reuters, the 27 leaders added a line to their summit statement at the last minute emphasising that principle. They also called on Britain to trigger the EU's exit clause by notifying them of its intention to withdraw, which would start a two year clock to negotiate its exit. "There can be no negotiations of any kind before this notification has taken place," the statement said. Cameron wants time for his successor to formulate a strategy and sound out European colleagues before beginning the countdown. Source: Bloomberg; Reuters Eurozone growth will be hit but bloc can weather storm, says ECB: Vítor Constâncio, the European Central Bank’s vice-president, has played down Brexit’s possible economic impact on the eurozone and has indicated that he expects the single-currency area to weather the blow. Constâncio, speaking on Wednesday at the ECB’s annual flagship conference in Sintra, Portugal, said the British decision to leave the EU would probably cause lower growth in the single currency area, as the UK would buy fewer exports from the eurozone’s businesses. However, he added that the UK was “not a major economic area” and that sterling was no longer a big international currency. “It’s not optimism. It’s about trying to stay objective and calm in the face of what’s going on,” the vice-president said. The British economy is the ninth largest in the world, based on an adjusted national income that takes into account the local cost of goods and services. Constâncio, who sits on the ECB governing council that sets interest rates, did not disclose details as to what the bank could do if the UK’s decision triggered a broader wave of uncertainty across Europe. “What is our response? We still have to wait a bit,” he said. Constâncio implied that, in such a situation, measures such as mass bond-buying by the ECB or rate cuts would be of limited use. “If the consequences would be more severe, what could be done? It’s with other authorities, it’s not with the ECB.” “The result of the referendum did not create a systemic failure,” he added saying that the euro had only dropped 2% against the dollar and there were no signs of pressure on spreads between safer German debt and riskier Italian and Spanish government bonds. Source: Financial Times Germany, ECB rebuff Renzi’s move to sidestep bank bail-ins: An attempt by Matteo Renzi to use Brexit-driven market turmoil to secure EU approval for Italy’s plans to recapitalise its banks without triggering bail-in rules has been rebuffed by Germany and the European Central Bank. “We wrote the rules for the credit system, we cannot change them every two years,” Angela Merkel, Germany’s chancellor, said on Wednesday in her first public comments since the Italian prime minister floated his idea on Monday. Renzi had sought to rally support from Merkel and French leader François Hollande for a suspension of bail in rules to allow Italy to recapitalise its banking sector. The move came after Italian bank shares, already depressed amid investor fears about the country’s €200bn in gross non-performing loans, tumbled again amid the wider market turmoil after the UK vote to leave the EU. Italy claims that its banks pose a systemic risk to the eurozone, which would allow the bloc to trigger a get-out clause related to ensuring “financial stability”. But Benôit Coeuré, a European Central Bank board member, rejected the idea on Wednesday. “If you hold the bail-in rules in abeyance today, if that is the step you want to take, then it’s pretty much the end of market union as we know it,” he told Italian media. Renzi’s latest skirmish with Europe over Italy’s banks comes amid increasing concerns about the country’s ability to manage not only its nonperforming loans but also growing pressure of zombie banks on the system. Source: Financial Times; Reuters Japan’s industrial production drops much more than forecast; Manufacturers left with more stock as shipments also decline: Japan’s industrial production declined more than economists forecast as a drop in exports hit most of the country’s manufacturing sectors. Output declined 2.3% in May from April when it rose 0.5%, the trade ministry reported on Thursday. The median forecast of economists surveyed by Bloomberg was for a 0.2% drop, and the slump was bigger than all but one of the estimates. The weak reading on production, along with Wednesday’s report that retail sales were flat in May and data showing another monthly drop in exports, adds to concern that Japan’s recovery is faltering after the economy returned to growth in the first quarter. The UK’s vote to leave the European Union last week has strengthened the yen and roiled financial markets, increasing risks to corporate earnings for Japanese companies. Output dropped in 11 of 15 sectors, with chemicals excluding pharmaceuticals the biggest contributor to the overall decline. Other categories that also contributed to the drop were general purpose machinery and electronic parts and devices. Output is forecast to rise 1.7% in June, and then climb 1.3% in July, according to the trade ministry’s report. Overall production of transportation equipment gained 0.7% as output of passenger cars rose, offsetting a decline in production of minicars. Output of the smaller vehicles dropped 11.8% in May from the previous month according to the ministry, with sales slumping 14.3% from a year earlier because of scandals surrounding fuel-economy tests. Source: Bloomberg Chinese yuan heads for worst quarter on record as outflows seen rising: The yuan’s worst quarterly performance on record is raising the risk of capital flight. China’s currency has slumped 2.9% since the end of March, the most since the nation unified the official and market rates at the start of 1994, to trade near its lowest level in five years. Losses deepened after the UK’s vote to secede from the European Union led to a jump in the dollar and dented the outlook for Chinese exports. Policy makers are trying to guide the currency lower versus its trading partners as the economy slows while simultaneously damping expectations of faster depreciation. Goldman Sachs Group Inc. warned Thursday that metals investors are concerned China may sharply weaken its exchange rate. The yuan fell 0.05% to 6.6415 a dollar on Thursday. The currency, which is trading near a five-year low, is forecast to weaken to 6.70 by year-end, based on the median estimate in a Bloomberg survey. It has declined 3.2% this quarter against a basket of peers, while the offshore yuan has lost 2.9% versus the greenback during the span. The authorities intervened via banks to support the offshore yuan on Wednesday morning, Bloomberg News reported citing people with knowledge of the matter. The Bloomberg article also said that there is plenty of evidence that local investors want out of China, while foreigners have so far shown little appetite to jump in. A program allowing some domestic and Hong Kong mutual funds to be sold on either side of the border has seen about 37 times more money leave China than enter so far this year. A link between the Shanghai and Hong Kong stock exchanges has to date enabled southbound outflows that are 39% more than the amount that’s moved north. In the first quarter, Chinese residents poured a record $1.7bn into Hong Kong’s insurance products, a popular way to move funds offshore. Source: Bloomberg Asian stocks rally as Brexit shock fades; FTSE 100 recovers all post-Brexit losses; oil fall after 8% 2-day jump; Treasuries, Gold fall as haven assets moderate: Financial markets continued to recover from the panic-selling triggered by last week’s UK vote to leave the European Union, with Asian stocks rallying and South Korea’s won strengthening. Global equities have recouped over the last two days more than half of the almost $4tn of market value wiped out over Friday and Monday. The UK’s FTSE 100 Index has indeed recovered all of its losses since the vote. The FTSE 100 is now up 3% from 23 June, Thursday, when UK chosen to vote in favour of leaving the European Union. The MSCI Asia Pacific Index climbed 1% as of 11:54 a.m. Tokyo time, rising to within 1% of where it closed on June 23, the day of the UK’s referendum. The measure plunged 3.7% on July 24 as the vote’s outcome was announced. Benchmark stock indexes advanced across Asia, with gauges in Australia, Hong Kong and Singapore all rallying more than 1%. Futures on the S&P 500 were little changed following a 1.7% surge in the index on Wednesday. The pound weakened 0.2% to $1.3404, after rebounding 1.5% over the last two days. The currency is on track for a 6.6% loss this quarter, its worst performance since 2008. The yen, which soared beyond 100 per dollar as the Brexit referendum results landed on June 24, was little changed Thursday at 102.83. It’s jumped more than 9% this quarter, set for its biggest gain since 2008. Crude oil fell for the first time in three days, after touching $50 a barrel on Wednesday as data showed a drop in US stockpiles. WTI crude fell 43 cents, or 0.9%, to $49.45 a barrel after climbing $2.03 or 4.2% to settle at $49.88 on Wednesday, the highest since June 23. Brent lost 60 cents, or 1.2%, to $50.01/bbl, after rising 4.2% to close at $50.61 yesterday. Treasuries and Gold retreated as demand for haven assets moderated. 10-year US treasury yield was almost unchanged at 1.51% after climbing 5 basis points on Wednesday. Australia’s 10-year yield was at 1.99% almost unchanged, while the yield on Japan’s benchmark 10-year note was at negative 0.229% vs yesterday’s -0.238%. UK’s 10-year yield closed yesterday at 0.95%, one basis point lower. Source: Bloomberg Sovereign emerging bond sales up 50% yr/yr in 2016 as negative-yield government debt surges $1.3tn to $11.7tn: Emerging market sovereigns borrowed just over $80bn in international bond markets in the first six months of 2016, a 50% jump over yearago levels, thanks to hefty new issues from Argentina and Qatar. Bond sales by emerging companies were however down by 15% to $134bn as of June 27, as Russian and Brazilian firms mostly stayed away despite a slight pick-up in the second quarter, a Reuters article reported citing data from Bank of America Merrill Lynch. Global market turmoil early in the year pushed emerging debt sales to a six-year low, but signs US rates would rise more slowly than expected has since allowed markets to recover. A fall in US and German yields, from which emerging debt is benchmarked, has also spurred issuance. According to a Financial Times article, the amount of government debt yielding less than zero has risen by more than $1tn this month to $11.7tn as investors believe central banks will step up stimulus measures in the wake of the UK’s vote to leave the EU. Sovereign issuance has been pushed up by Argentina's $16.5bn bond that marked the country's return to bond markets after a 15-year gap. The issue amassed orders of almost $70bn. Qatar's $9bn bond meanwhile was the biggest ever Gulf offering and orders topped $23bn. Russia sold Eurobond in May after three years. But big investors appear to have shunned the issue which was not cleared by the Clearstream and Euroclear settlement houses. Market turmoil following Britain's vote to exit the European Union has halted issuance but it may resume in coming weeks as expectations grow of more stimulus from Europe and Japan. Investors are now awaiting Saudi Arabia's debut bond, expected at over $15bn. Another potential issuer is Nigeria, which has just depegged the naira from the dollar, and wants to raise $1bn. These deals will help push full-year sovereign supply to $127.3bn, JPMorgan predicts, versus $86bn in 2015, the Reuters article reported. The annual post-2009 average is $81bn, it noted. However, JPM forecasts corporate issuance at $220bn versus $239bn in 2014 and an annual $355bn average between 2012-2014. Source: Reuters Middle East & Africa News Saudi Arabia halves fourth quarter growth estimate to 1.8% from 3.6%: Saudi Arabia’s statistics office has revised the Kingdom’s fourth-quarter growth estimate to just 1.8% from 3.6% it reported in April, a Reuters article reported Wednesday saying that the revised growth rate suggest a major slowdown in the Kingdom. In April, the government's statistics office released data showing gross domestic product grew 3.6% in the fourth quarter of 2015 from a year earlier. That was the same as third-quarter growth, implying the economy was coping well with cheap oil. However, this month, the statistics office posted new data revising the fourthquarter rise to just 1.8% - a major slowdown, and one which has some analysts speculating that Saudi Arabia could come close to recession this year. The Reuters article reportedly said almost all nations, including developed ones, revise their economic data after the initial release; but the Saudi fourth-quarter change was huge. According to Reuters an OECD study last year found revisions to year-on-year GDP growth rates by 18 member countries rarely exceeded 0.3 percentage point within the following five months. Source: Reuters Abu Dhabi announces to merge sovereign investment funds Mubadala and IPIC: Abu Dhabi on Wednesday announced its plans to merge state investment funds Mubadala Development Company and International Petroleum Investment Company. An official statement, announced through state news agency WAM, said: "His Highness Sheikh Mohamed bin Zayed, Crown Prince of Abu Dhabi, Deputy Supreme Commander of the UAE Armed Forces and Chairman of the Abu Dhabi Executive Council, has issued a resolution to merge International Petroleum Investment Company, IPIC, and Mubadala Development Company, Mubadala." The resolution stipulated that a joint committee be created and assigned with the responsibility of merging the businesses of the two companies. The joint committee will be chaired by His Highness Sheikh Mansour bin Zayed Al Nahyan, Deputy Prime Minister and Minister of Presidential Affairs, with HE Khaldoon Khalifa Al Mubarak serving as Vice Chairman and the membership of HE Suhail Mohamed Faraj Al Mazrouei, HE Hamad Al Hurr Al Suwaidi, and the Chairman of the Abu Dhabi Department of Finance. Integrating the two entities would create greater benefits and enhanced economic value to the Government of Abu Dhabi, the statement said and added that the combined entity will realise synergies and growth in multiple sectors including the energy and utilities sector, technology, aerospace, industry, health care, real estate and financial investments. The statement further noted that the merger will also have the ability to contribute more significantly to the diversification of the economy, in line with the Abu Dhabi Plan and the country’s long-term vision. The combination of two funds would pool assets of about $135bn and debt of about $42bn, Bloomberg reported citing its own calculation. Source: WAM; Bloomberg Oman sells $500m 6-yr privately placed sukuk: Oman's government has sold a $500m six-year sukuk in a private placement, Reuters reported Wednesday citing a document from the lead manager. The sukuk's profit rate is 3.5% and the Ijarastructured instrument will be repaid in three equal instalments after four, five and six years, according to the document from Standard Chartered. Ijara is a common sharia-compliant sale and lease-back contract. Oman has already raised a $2.5bn two-part bond and a $1bn loan from banks in 2016. Source: Reuters Oman oil company PDO raises $4bn of project financing: Petroleum Development Oman (PDO), the country's top oil and gas exploration and production company, has obtained a $4bn loan from international banks. The five-year pre-export facility is the company's first international loan and was priced at 160 basis points over the London interbank offered rate (Libor), state-owned PDO said on Wednesday. "This competitive new source of funding will enable us to reduce reliance on government funding, so that it can redeploy resources to other areas of the economy," said Raoul Restucci, PDO's managing director. The loan will help to finance new oil and gas facilities in Oman, PDO said, adding that it planned to invest more than $20bn in the next five years. Its projects include the Rabab Harweel facility, which is to develop 240 million barrels of oil and 100 million barrels of condensate while exporting 1 trillion cubic feet of non-associated gas when production starts in 2019. According to a Reuters article, bankers said that the PDO deal is expected to clear the way for other state-linked Omani companies to take international loans, including a proposed $1.35bn facility by Oman Oil for its exploration and production subsidiary and a $250m loan for Oman Shipping. The pricing and size of the PDO's loan indicate the country is still able to attract demand for its debt. PDO initially considered raising about $3 billion but increased that because of heavy demand, bankers said. Nevertheless, the loan's pre-export structure – in which funds are advanced based on proven orders – gives lenders more security than a plain sovereign loan. HSBC Bank Oman advised PDO on the deal. The senior phase of the facility, before it went to general syndication, involved Bank of China, HSBC Bank, ING Bank, Intesa Sanpaolo, JPMorgan, National Bank of Abu Dhabi, Natixis, Societe Generale, Standard Chartered Bank and Sumitomo Mitsui Banking Corp. Source: Reuters Bahrain Steel raises $400m loan for refinancing: Bahrain Steel has raised $400m through a seven year two-part loan for refinancing purpose, Bloomberg reported yesterday. No further details regarding the loan was reported. Last month Bloomberg said Bahrain Steel was in talks with banks and seeking a lown worth $400m. AT that time Bloomberg said Bahrain Steel has appointed Mashreqbank, Bank ABC and HSBC as the arrangers and looking for a 7-year maturity. Source: Bloomberg Qatar's Rasgas says signs new LNG deal with France's EDF: Qatar's RasGas said on Wednesday it signed a new agreement with French energy company EDF to deliver up to 2 million tonnes per annum (Mtpa) of liquefied natural gas (LNG) starting from next year. Under the deal, Ras Laffan Liquefied Natural Gas Company 3 will deliver the LNG into EDF's new terminal in Dunkerque, France. "This new agreement complements three existing long term sales and purchase agreements between RasGas ventures and EDF Group subsidiaries, for delivery of up to 4.6 Mtpa to Edison in Italy and up to 3.5 Mtpa to EDF Trading in Belgium," RasGas said. Source: Reuters Egypt bans use of debit cards abroad amid hard currency shortage: Egypt has ordered banks to stop clients from using their Egyptian pound account debit cards abroad, a central bank official said on Wednesday, a move to combat Ehypt's acute foreign currency shortage. "We sent a letter to bank chiefs today to stop the use of debit cards outside the country. As for credit cards it is business as usual and each bank sets their own limit for their clients," the official told Reuters. Egypt depends on imports for everything from food to fuel and has suffered from a deficit of dollars in the formal banking system since a 2011 uprising drove away tourists and foreign investors - crucial sources of hard currency. "We have started implementing the central bank's directive as of today," one state-owned bank chief told Reuters. Source: Reuters Gulf markets push higher but volumes subdued: Most stock markets in the Gulf nudged up on Wednesday, supported by recoveries in oil and global equity prices after the shock of Britain's vote to leave the European Union last week, but turnover was small before summer and Eid al Fitr holidays. Riyadh's index added 0.3%, buoyed by the banking and telecommunications sectors, with phone operator Zain KSA climbing 1.3%. Shares in retailer L'azurde Company for Jewellery closed 7.6% higher at 39.80 riyals as they listed, but came off their intra-day high of 40.70 riyals. It is unusual for a Saudi stock not to end up its 10% daily limit on its first day of trade. The company sold 12.9 million shares in its initial public offer at 37.0 riyals per share. Main competitor Fitaihi Holding dropped 3.0%. Dubai's index fell 0.4%, sagging in the final hour of trade as investors booked profits in small and mid-cap stocks ahead of the holidays. Islamic insurer Dar Al Takaful slumped 10.0%. The most heavily traded stock, amusement park builder Dubai Parks and Resorts, dropped 3.2%. Abu Dhabi's index edged up 0.2%. National Bank of Abu Dhabi and Abu Dhabi Commercial Bank gained 1.2% each. Doha's index nudged up 0.1% in the final hour of trade as investors bought shares with attractive dividend yields ahead of secondquarter corporate results. Doha Bank gained 1.6%. Main indices in Oman and Bahrain added 00.3% and 0.4% respectively, while Kuwait’s main index was unchanged. In Cairo, the main index added 0.2%. El Sewedy Electric, the top gainer, jumped 4.7%. But Commercial International Bank lost 1.2%and investment bank EFG Hermes dropped 1.1%. Source: Reuters Iraq secures $2.7bn US loan from for military equipment: Iraq secured a $2.7bn loan from the United States on Wednesday to fund ammunition and maintenance of fighter jets, tanks and other military equipment for use in the war against Islamic State. Baghdad will have eight and a half years, including a one-year grace period, to repay the loan, which carries a 6.45% interest rate, a US embassy statement said. The deal will help Iraq service its F-16 fighter jets, M1A1 tanks, armoured vehicles and attack helicopters as well as maintain navy ships and systems to protect the Umm Qasr port and southern oil platforms, the embassy added. Declining global oil prices and the costs of fighting Islamic State militants who seized a third of Iraq's territory in 2014 have hit government revenues, which rely almost completely on oil exports. Iraq received its first batch of F-16s in 2015 as a part of a $65m deal with Lockheed Martin Corp. Source: Reuters Nigerian banks find naira cheer short-lived as economy weighs: Optimism that a devaluation of Nigeria’s naira would breathe life into the country’s banking stocks faded almost as quickly as it started, a Bloomberg news article reported. The central bank’s abandoning of a 16-month currency peg was greeted with a world-beating rally in the nation’s shares on expectations foreign investors would return to Africa’s largest economy. It didn’t last, with all but two of the country’s biggest banking stocks falling since the naira started trading freely on June 20. The main risk is coming from a possible recession that will make it harder for lenders to make money and extend credit with unpaid loans on the increase, the Bloomberg article highlighted. The ratio of loans not paid for more than three months worsened to 4.9% at the end of last year from 2.8% in 2014, according to the Nigeria Deposit Insurance Corp. Trading in foreign currency, which all but dried up because of the exchange controls, is yet to pick up. Foreigners have not flocked back amid lower oil prices and the UK’s vote to leave the European Union, with investors such as AllianceBernstein LP and Loomis Sayles & Co. saying the naira’s 29% depreciation isn’t enough. The 10-member Nigerian Stock Exchange Banks Index has declined 6% since surging to a 9-month high on June 23. That compares with a 4% drop in the NSE All Share Index over the same period, with Sterling Bank Plc, Unity Bank Plc, Zenith Bank Plc and FBN Holdings Plc among the 10 biggest losers. Source: Bloomberg Rakesh Sahu Chavan Bhogaita Market Insights & Strategy Global Markets National Bank of Abu Dhabi Disclaimer: To the fullest extent allowed by applicable laws and regulations, National Bank of Abu Dhabi PJSC (the “Bank”) and any other affiliate or subsidiary of the Bank, expressly disclaim all warranties and representations in respect of this communication. The content is confidential and is provided for your information purposes only on an “as is” and “as available” basis and no liability is accepted for or representation is made by the Bank in respect of the quality, completeness or accuracy of the information and the Bank has undertaken no independent verification in relation thereto nor is it under any duty to do so whether prepared in part or in full by the Bank or any third party. Furthermore, the Bank shall be under no obligation to provide you with any change or update in relation to said content. 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