Argentina Peso's devaluation triggers EM currency volatility; bouts of volatility represent buy opportunities given macro backdrop; flight to safety strengthened DM sovereign bonds; GCC credit market readies for new issuance; UAE banking sector's outlook bright according to S&P The end of last week saw equity markets sharply down, following a sell-off in emerging market (EM) currencies and weakness in Chinese manufacturing data, which pointed to a weakening in global economic growth. Volatility spiked (the VIX shot up to 18.14) while a slump in the Turkish lira to $/TRY 2.34 vs. 2.15 at end-2013 was accompanied by Argentina's central bank ceasing to defend the Peso which weakened to $/ ARS 8.15 vs. 6.5 at end-2013. The dominant pattern in the risk aversion in emerging market FX rates was the sell-off in commodity-exporting countries that depend on Chinese demand. The South African Rand, the Brazilian Real and the Chilean Peso along with the Russian Ruble and the Indian Rupee saw significant losses. The volatility could extend through the week as markets await the decision of the US Federal Reserve Bank's Open Market Committee (FOMC) which meets on Jan 28-29 , on whether to cut another $10 billion of money-creation under its quantitative easing program. The flight to safety strengthened US treasuries to 2.715 per cent from 2.85 per cent on the 10 year. The UK unemployment report came in stronger on Wednesday; the headline rate to dropped to 7.1 per cent from 7.4 per cent. UK 10 year gilts strengthened to 2.77 per cent while Portugal 10 year sovereign bonds fell below five per cent for the first time since August 2010 but weakened to close at 5.233 per cent last week. So far approximately $74 billion has been raised in the investment grade global bond markets. In a sign of waning interest in the fixed income asset class, Mohamed El-Erian stepped down from his post as chief executive officer and co-chief investment officer of the Pacific Investment Management Company (PIMCO). El-Erian will depart PIMCO in mid-March as part of a leadership overhaul, but will remain on with its parent company Allianz SE . We do not expect any serious adverse effect on PIMCO funds recommended by Emirates NBD. In local credit markets – which have to date outperformed due to the lack of new bond issuance – Kuwait Projects (KIPCO) is the first GCC company to be on road show for a new bond issue. Investors are also awaiting new supply from Dubai Inc. Chief executive Saeed Mohammed Al Tayer of DEWA – State owned Dubai Electricity and Water Authority – commented that DEWA will not be issuing bonds in 2014; buyers of DEWA bonds showed renewed interest on the back of this headline news. In a recently published report – UAE Banking Sector Outlook 2014 – Standard & Poor's Rating Services says that the prospect for UAE banks look bright this year due to recovering real estate prices and credit growth picking up. Real-estate related credit losses are expected to gradually decrease, while the Dubai fast-paced economy should provide the necessary support for banking activity to expand. Emirates NBD announced profit of AED 3.3 billion in 2013, up 27 per cent on 2012. It was also announced that 25 per cent of profits will be distributed through dividends. The International Energy Agency (IEA) has forecast a 1.4 percent increase in oil world demand, mainly driven by growth in developed economies, while disappointment for future demand by China cannot be ruled out, considering that Chinese oil growth numbers in 2013 undershot IEA's estimates. Another potentially negative factor for oil prices is Iran's recent announcement on the voluntary reduction of uranium enrichment at two of its key facilities. Dollar strength against EM currencies and equity weakness helped gold clear the important resistance level of $1255 and gold closed up for the fifth consecutive week. Market attention will focus short term on the Fed's tapering and on the expected slowdown of physical buying from China , due to seasonal factors and to the disappointing manufacturing data.
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