An array of potentially market-moving events are expected this month.
It started with the Opec meeting last week, which turned out to be a non-event. The next event, the US Fed meeting on June 15, could also prove to be similar, following the Federal Reserve chair’s comments on Monday. And finally the Brexit vote on June 23.
The effect of these events might be amplified by the low liquidity period during Ramadan for the Mena region, and by a historically slow summer season across the globe.
Ms Yellen on Monday indicated that although th US economy is improving, the timing of a US rate hike remains unclear.
Global markets, however, have taken the prospect of a near-term Fed rate hike calmly, with many financial commentators arguing that the global economy had sufficient momentum and growth to support such a move. But such a move looks highly unlikely.
In the energy space, unanticipated outages have dominated the oil markets in the second quarter and, as a result, oil prices have been well supported despite an appreciating US dollar.
Nigerian outages, Canadian wild fires and the Libyan port blockade, even if considered temporary, have helped oil markets. These outages have brought forward the market rebalancing timeline, which was otherwise expected by early next year.
Fundamentally, three variables have been dominating our internal discussions on oil: the US production decline; inventory draw down and the oil price curve. The first two have been supportive for oil prices, but the last factor, while improving, continues to reflect high inventory levels.
An oil price vulnerability discussion at this stage would centre around the speed at which production is reinstated in Canada, appeasement of Nigerian militants and the disconnect of oil prices versus base metal prices of late.
Saudi Arabia continues to dominate headlines in the region, having recently restructured some ministries. A major change was the replacement of Ali Al Naimi, Saudi Arabia’s oil minister since 1995, with Khaled Al Falih, the current chairman of Saudi Aramco, through the creation of a new energy, industry and natural resources ministry. Another change was at Saudi Arabian Monetary Agency, the Saudi central bank, where Ahmed Al Kholifey, the former deputy governor for research and international affairs, took over as governor, replacing Fahad Al Mubarak who had been the governor since 2011. We do not expect to see any immediate changes to currency or oil policy as a result of this reshuffle.
Devaluation bets on the Saudi riyal increased last month even as oil prices moved higher. Based on traditional metrics, the kingdom has enough room to defend the riyal, but twin deficits mean a net accretion to reserves would be difficult without an international bond issuance, especially at the current level of oil prices.
Media reports suggest that Saudi Arabia is considering a US$15 billion bond issue after Ramadan to finance the country’s budget deficit, a trend that is visible across the region.
The bond issuance is expected to improve banking sector liquidity, which has been tightening with the loan-to-deposit ratio approaching the regulatory limit of 90 per cent.
In the UAE, PMI data continues to be expansionary. The index last month improved to 54 from 52.8 in April, the second highest reading so far this year, driven by strong output growth.
Earlier, Abdul Aziz Al Ghurair, the chairman of the UAE Banking Federation, said the calculation of the Emirates Interbank Offered Rate (Eibor) has been reformulated to reflect the true cost of funds.
A new component has been added to Eibor to reflect what banks actually need to pay to attract deposits from large clients versus the previous version that reflected the price at which banks lent to each other. The Eibor is reported every day as an average of rates submitted by 11 banks, including the local units of HSBC Holdings and Standard Chartered, after excluding the two highest and two lowest quotes for every tenor. The three-month Eibor is at a three-year high, as the decline in oil prices has tightened liquidity in UAE banking.
Regional markets mirror an uncertain global backdrop and might face a number of headwinds as we enter Ramadan and the summer season. Valuations are supportive in the UAE, while Saudi sentiment is supported by the reform plan and oil price recovery, but liquidity in the region is likely to decline during Ramadan, leading to an increase in volatility.
Saleem Khokhar is the head of fund management at National Bank of Abu Dhabi.
Follow The National’s Business section on Twitter