Business | Markets
GCC credit markets resilient in face of weakness elsewhere
Many investors have now reduced their cash balances and await further market moves
- HSBC Dubai Fixed Income Trading
- Published: 00:11 May 25, 2008
Dubai: Worries over inflation, the rising cost of a barrel of oil, and reduced expectations of further US rate cuts weighed on the market last week, as the two-month market recovery continued to stall.
Tuesday's crucial Producer Price Index number came in at 0.4 per cent versus. an expected 0.2 per cent, highlighting inflationary pressures in the economy that were further stoked by a dramatic rally in oil on Wednesday. As crude rose above $135 a barrel, so equity markets in the US, Europe and Asia continued to slide.
Global credit markets suffered in a similar fashion, as the buying that drove credit spreads tighter in previous weeks began to dry up.
Importantly, a large number of US and European institutions have now tapped the market for funding, the most recent of those being the $15 billion UBS rights issue. Many investors have now reduced their cash balances and have retreated to the sidelines to await further market moves.
Regional credit markets came under pressure on the back of weakness elsewhere, however, resilience of the markets proved to be quite strong in the face of the bears with only a 5bps widening posted by the HSBC/DIFX Sukuk Index and a 6bps tightening posted by the HSBC/DIFX GCC (Gulf Cooperation Council) Conventional Index.
Whereas a large percentage of the sukuk index consists of floating rate notes (FRNs) the conventional sector comprises of a larger percentage of fixed rate bonds. Yields on US treasuries increased this week, making fixed rate bonds more attractive.
The dirham-denominated market came under pressure last week on the back of speculation of further supply. Reports of statements by the Deputy CEO of the Abu Dhabi Securities Development on the issuance of an Abu Dhabi yield curve lead to speculation of further supply. This coupled with a weaker backdrop led to a selloff in dirham-denominated issues.
The new dirham RAK Capital deal was launched into that environment, which led to the issue widening by 15bps shortly thereafter. Despite the intra-week pressures the dirham market posted a significant recovery on the back of regional and foreign demand and the new RAK deal closed 5bps wider mid market.
In addition to potential supply from the Government of Abu Dhabi, there have been several announcements of new issues. Aldar announced a road show will begin this week for its new dirham-denominated Sukuk Al Ijara.
The Dubai Electricity and Water Authority (Dewa) was also rumoured to be planning a dirham-denominated 5-year Sukuk Al Ijara and last week it was reported that Amlak is planning to sell Islamic debt in the third quarter.
Arab Banking Corp confirmed the details of the $1.1 billion rights issue it had announced with its first-quarter results and Sabic sold 5 billion Saudi riyal of 5 year Sukuk FRN.
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