Non-oil economies continue to see downtrend

Abu Dhabi: Even though the week was short, with the United States out on Friday, it was an eventful one for markets.

Oil prices continued to break record highs with crude closing above $145 intra week before giving up some of the gains towards the end of it, as geopolitical concerns linked to Iranian nuclear capabilities provided the momentum.

The higher oil price contributing to lower growth expectations led to Asian stocks declining for a fourth straight week.

The MSCI Asia-Pacific Index touched on lows not seen since November 2006.

European stocks also posted the fifth negative weekly performance.

In economic news, a 25bps increase took the euro zone interest rates to a seven year high. However, a less hawkish tone from the ECB damped fears of further rises to come. Weak payroll and employment numbers out of the US led to short-end US Treasury yields declining by 8bps.

Focus on financial system stresses shifted to smaller banks

UBS announced that second quarter results will be at or slightly below breakeven, while Deutsche Bank said that it anticipated a profitable second quarter.

Both banks said they had no need to raise new equity. Shortly after the UBS announcement, Moody's posted a one notch downgrade to their ratings to Aa2.

However, in the US the focus of concerns on the health of the banking system shifted to the smaller banks as large exposures to construction and land loans placed additional pressure on the smaller balance sheets.

But regional banks still offer good value

Strong performance

Despite concerns elsewhere, regionally the banking sector continues to post a strong performance with reports surfacing in the local press on expectation of UAE banks to record double digit second quarter growth in profits.

GCC senior financials continue to see strong demand by regional accounts as they see good value in the fundamentally strong credits that were caught up in the wave of the credit crunch.

Underperformer

The HSBC/ DIFX Sukuk Index widened 12 bps to record highs as the sukuk market underperformed the rest of our sectors in thin volumes. However, supporting bids appeared towards the end of the week as the widening presented interesting opportunities. A clear example of this is DIFCDU 2012 FRN rated A1/A+ returning six per cent. We also saw an increase in activity in credit default swaps compared to bonds as investors looked to hedge their exposure in the weakening environment rather than sell bonds with strong fundamentals too cheaply.

- HSBC Dubai Fixed Income Trading