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mashreq Fixed Income Trading Daily Market Update Thursday, January 21, 2016 Quote of the Day "Either I will find a way, or I will make one.” (Philip Sidney) Market Update UAE Central Bank halts foreign banks waivers on Government lending The UAE Central Bank has reportedly removed waivers given to foreign banks allowing them to use their group's capital reserves to calculate lending to the government and state-owned entities, sources aware of the matter told Reuters. The change, related to 2012 legislation to counter dangers to the Gulf state's banking system from lenders accumulating large exposures to single borrowers, means foreign banks can only use the reserves of their locally- registered units to calculate lending limits. Large international banks should be unaffected by the move, as they register the loans made in the UAE in central processing centres outside the country. However, the sources said many regional Gulf and Asian banks, which traditionally booked UAE business within local units and predominantly lend to government entities and large companies, would be significantly impacted. One, at a bank affected by the move, said his organisation had stopped nearly all lending to clients as it evaluated the move's implications. The UAE central bank did not respond to a request for comment. The 2012 rules were brought in after Dubai state-linked entities needed to restructure tens of billions of dollars of debt -- a move which forced banks to set aside large amounts of cash as provisions. According to the circular outlining the ruling, the exposure to the government and government-linked companies of branches of foreign banks in the UAE must not exceed 30% of the local capital base. But the 2012 circular also said the central bank may give certain exemptions to the rules. For banks which received such waivers, these were not renewed as of December 31, sources aware of the move said. It is unclear how many banks were given waivers. (Reuters) Saudi Arabia said to plan first debt sale of 2016 next week Saudi Arabia plans to hold a debt auction next week, its first bond sale of the year, as the world’s largest oil exporter seeks to plug a budget deficit, according to two people familiar with the matter. The auction, to raise as much as 20 billion riyals (USD5.3 billion), is the first indication Saudi Arabia will continue tapping the local debt market to fund a budget gap, forecast by the International Monetary Fund to be 14% of gross domestic product this year. The Saudi Arabian Monetary Agency plans to price the auction on Jan. 24, with settlement of the sale two days later, the people said, asking not to be identified as the information is private. Saudi Arabia will probably sell about 120 billion riyals of debt in 2016 to support its finances after oil’s slump, Saudi Fransi Capital said in October. Last year, the government planned to raise 90 billion riyals to 100 billion riyals from monthly debt sales to local institutions, people told Bloomberg in August. The five-year tranche may be priced from 40 basis points to 45 basis points above similar maturity U.S. Treasuries, the seven-year segment 50 basis points to 55 basis points and the 10-year securities 60 basis points to 65 basis points, the people said. (Bloomberg) Brookfield plans USD1 billion office tower in DIFC Brookfield Property Partners LP plans to start building the first commercial tower to be developed in Dubai’s financial district since the global credit crisis seven years ago. The New York-based company and Dubai’s sovereign wealth fund, Investment Corporation of Dubai, will split the cost of the 53-story tower in the Dubai International Financial Centre, the companies said in joint press conference Wednesday. Construction of the 1.5 million square-foot (139,000 square-meter) tower, designed by Foster + Partners, will start immediately and finish by the end of 2018, the companies said. The building is expected to have a value of more than USD1 billion when finished and will be financed by loans from various banks, Brookfield Chairman Ric Clark said. “Dubai’s economy doesn’t rely on the energy industry at all and I think, as a consumer, they are probably benefiting from low oil prices,” Clark said. Large companies looking to be in the region will use Dubai as a hub because of the great quality of life, creating demand for offices, he said. (Bloomberg) Saudi Aramco in advanced talks to buy China refinery stakes -chairman Saudi Aramco is in advanced talks to invest in refineries in China and the company was also in talks with CNPC and Sinopec for investment opportunities in refining, marketing and petrochemicals, the chairman of the state oil company said. Saudi Aramco Chairman Khalid al-Falih also told reporters on the sidelines of the official inauguration of Yasref, a 400,000 barrels per day oil refinery, that there may be opportunities for further expansion of the plant. The refinery, which began operations at full capacity in July, is a joint venture between Saudi Aramco , the world's biggest oil company, and China's Sinopec. "Yes we are in talks with CNPC and Sinopec to enter investment opportunities in China. There are many refineries inside China in advanced stages to negotiate for them," Falih said. The deal is estimated to be worth around USD1-USD1.5 billion, although final valuations, assets and stakes were subject to change. (Reuters) US economy seen growing 0.7% in fourth quarter according to Atlanta Fed The US economy is on track to grow 0.7% in the fourth quarter after reports on domestic consumer prices and housing starts in December, the Atlanta Federal Reserve's GDPNow forecast model showed on Wednesday. "The forecasts for fourth quarter real consumer spending growth and real residential investment growth each increased slightly," the Atlanta Fed said. (Reuters) US consumer prices fall in December on lower commodities prices The cost of living in the US dropped in December, led by a slump in commodities that’s roiling global markets. The CPI declined 0.1% after being little changed in November, a Labor Department report showed on Wednesday. The median forecast in a Bloomberg survey of economists called for a 0.1% increase. Excluding food and fuel, the so-called core index rose 0.1%, less than forecast and the smallest gain in four months. Core consumer prices were projected to rise 0.2% according to the median forecast in the Bloomberg survey of economists. For the year 2015, consumer prices climbed 0.7% after rising 0.8% in 2014. It was the smallest advance since 2008. Excluding food and energy, they rose 2.1% last year following a 1.6% increase in 2014. (Bloomberg) UK unemployment hits decade low as labor market tightens UK unemployment unexpectedly fell to the lowest in almost a decade and wage growth slowed less than economists forecast as the labor market continued to strengthen. Pay excluding bonuses rose 1.9% in the three months through November from a year earlier compared with 2% in the quarter through October, the Office for National Statistics said in London on Wednesday. Unemployment fell to 5.1%, the lowest since the three months through January 2006. (Bloomberg) China seen losing another USD300 billion in FX reserves in 2016 China’s foreign-exchange reserves are seen tumbling by USD300 billion this year to a level near what some analysts say risks undermining confidence in the central bank’s ability to defend the currency. Ten out of 12 economists in a Bloomberg survey last week forecast reserves will drop to USD3 trillion or less by the end of this year, and the median estimate is for that same amount. The holdings are projected to tumble further, to USD2.66 trillion by the end of next year, the lowest since 2010. Policy makers have been battling to hold up the yuan amid slower growth and slumping stocks, burning through reserves to reduce yuan volatility. The stockpile plunged USD513 billion last year to USD3.33 trillion, the first annual drop since 1992, as capital outflows accelerated and the yuan lost its status as a one-way bet on appreciation after a surprise devaluation in August. (Bloomberg) PBOC injects most cash in 3 years in an OMO The People’s Bank of China injected the most cash in almost three years in its open-market operations, helping ease a cash squeeze as the coming Chinese New Year holiday spurs demand for funds at a time when capital outflows are mounting. The central bank said it conducted 110 billion yuan (USD16.7 Page 1 mashreq Fixed Income Trading Daily Market Update Thursday, January 21, 2016 billion) of seven-day reverse-repurchase agreements and 290 billion yuan of 28-day contracts. That compares with 160 billion yuan of contracts that matured and resulted in a net cash injection of 315 billion yuan for this week’s two auctions. Other lending tools were used to add about 700 billion yuan this week for terms ranging from three days to a year. China is trying to hold borrowing costs down to support its economy without spurring an exodus of funds that drove the yuan to a five-year low this month. Gross domestic product rose last year at the slowest pace in a quarter century and intervention to prop up the exchange rate led to a record USD513 billion plunge in the nation’s foreign-exchange reserves. The Chinese New Year holiday will shut China’s financial markets throughout the week starting February 8.