Gulf credit markets fall as US recession fears return

Abu Dhabi: A quiet few days for economic data ended with a bang last week, as the US reported the biggest jump in unemployment for 22 years. Equities sold off sharply and credit markets followed, as the focus moved away from the creditworthiness of financial institutions and towards concerns over a full-blown recession in the US.

Banks and brokers had been grabbing the headlines early in the week, as S&P cut their ratings on Morgan Stanley, Lehman Brothers and Merrill Lynch. Lehman stayed on the front pages, as the market continued to worry about its liquidity situation. A fall in Lehman's equity price, to $29 from $65 earlier this year, helped to drive credit markets weaker.

The week was rounded off by Friday's economic data, which showed US unemployment rising from five per cent to 5.5 per cent in an almost unprecedented move. US and European equity markets quickly sold off and were down more than one per cent immediately after the data.

GCC credits markets followed suit as the HSBC/ DIFX Sukuk Index broke out of its recent range to reach a wide of 234. This level, last seen on April 17, reflects the widening in mean spread vs. Libor of a basket of approximately 40 sukuk.

Local currency markets were less volatile, and the flow of dirham-denominated deals continued with new five-year transactions from Aldar and Dewa, totalling almost Dh7 billion.

Dewa priced at 125 bps over six-month EIBOR, while Aldar priced at 125bps over three month EIBOR. By way of comparison, the Nakheel 2010s are offered at 200bps over EIBOR, and the Dubai Government 2013s are trading at 52bps over EIBOR.

The dirham-denominated sector closed the week mostly unchanged, with a handful of issues underperforming. The volume of recent issuance has weighed on the sector, with a number of local government-related entities tapping the market."

- HSBC Dubai Fixed Income Trading