Risk-off ahead of earnings; Egypt curve under pressure; Kuwaiti AT1 paper looking cheap vs peers

Macro Sentiment

Negative global lead again this morning following a mixed session yesterday, the market is still relatively directionless as we enter a busy period of corporate earnings and Fed meet next week. Stock futures are trending red and Rates are showing strength with the belly-long end rallying 10bps over the last 24hrs, signaling this current phase of risk off is likely to linger. UST 2, 10 and 30Y sit at 4.07, 3.46 and 3.69% respectively. Oil has posted gains close to $2 since yesterday's regional close on supply concerns. Brent and WTI sitting at $82.59 and $78.63 this morning.

MENA Flows

Another fairly muted session yesterday with most of the region still away from the desk on Eid break. Things should be back up to speed by the end of the week, not much to report in the meantime.

High-Grade Sovs/Corps: Opening high grade positively following the overnight move in rates, approx. 0.25pt up across the curve. Starting to see some interesting dislocations especially in the long end. Yesterday we pin pointed a trade in DUGB for example, sell the 43s and buy the 50s for a 25bps pick up in z-spread and also a 21pt cash price difference. There are idiosyncrasies across the space if you look hard enough.

High-Beta Sovs: Risk-off sentiment is testing the HY sov space, Egypt is especially underperforming and we were another ~2pt down across the curve. The Sukuks have been highlighted for their resilience due to the captured Islamic audience unable to switch into the significantly cheaper conventional paper, however even those were down a leg and remain a target for short sellers. Bahrain and Oman are being propped up by higher oil, but there’s little resistance and enough offer-side liquidity to remain vulnerable.

HY Corps: Same story repeats in the HY space, things are highly technical and idiosyncratic with specific credit and tenors in favor (DARALA 26/27, ARACEN 26) and others, particularly the short end (DARALA 25, ARACEN 24), lacking demand. General weakness remains with the likes of PVTDEP/ARADAD/GFHSUK still better offered. Damac returned to the market last week with a 3Y Sukuk, printing at 7.75% on the eve of the Eid break. Very peculiar timing, but we’re hearing the deal was a quasi-reverse inquiry with a lead underwriting a significant portion of the deal from private banking demand. The deal size was limited to $400mn and secondary trading was quiet, currently above reoffer 100.50/100.75.

Perps/Financials: The AT1 space has been relatively quiet recently, but with prices having run up following the cooling of sector concerns we’re beginning to see people lining to take some risk off the table, especially in the more expensive high-grade UAE space. Kuwaiti AT1 remain the underperformer but are now showing decent upside over the likes of UAE or Saudi counterparts, 8% handle vs 6%. Not many big movers or shakers to report, but there is offer-side liquidity for those interested.

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