GulfBase GCC Cap Indices
IndexLevelChg%
Large Cap3,925 -0.83
Med Cap3,929 -1.00
Small Cap5,108 -1.14
Micro Cap8,598 -1.08

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ETISALAT 18.05 923,419

Market Review and Outlook

Source: NCB Capital

Why LCs is Another Sign of a Moderate Business Cycle?

As we pointed earlier in the year, reviewing the LCs settled and opened does provide a leading indicator on the status of domestic consumption as well as investment. Since Nov08 and Oct08, negativity took hold of the annual growth rate in the total value of LCs settled and opened, respectively, which represents the worst-ever performance for LCs. By the end of Jul09, LCs settled declined by a staggering 31.6% while LCs opened fell by a higher figure of 38.5%. Can we safely say that this illustrates a moderation in domestic demand? Certainly a yes because the downtrend had maintained a solid stance across most of the major categories, namely foodstuffs, building materials, and motor vehicles. Regarding building materials, the downfall continued unabatedly, with the latest figure of -51.9% Y/Y reflecting both depressed prices and lower demand compared to 2008. In addition, teetering big-ticket consumer items like cars and appliances accentuates our belief in a moderate demand cycle. Coupled with domestic banks that hoard excess reserves at around 60% of the total deposits with SAMA (see 31st Aug09 Saudi Macro.), supply of credit and demand for goods are feeding into each other to produce this ailing status of LCs and intuitively consumer demand.

No change in Fed Funds, Slight change in Asset Purchase Program

As expected, on 23 Sep, the FOMC decided to keep its target range for the Fed funds rate at 0-0.25%. But more importantly, the deadline for the asset purchase program was extended to 1Q2010 from 4Q2009, as the FOMC decided to slow the pace of purchases of agency MBS (USD1250 billion) and agency debt (USD200 billion) in order to ensure a smooth transition by the end of the program. This we believe is an indication that any similar alternative easing measures will become less likely going forward. The way we read the FOMC statement is that there is a long way to go before we see any interest hikes. The Fed has upgraded its current assessment of the economy on the back of the recent improvement in housing, industrial production and consumer data. However, the economic outlook remains downbeat and will necessitate “exceptionally low” interest rates for an “extended period”. This is because: (1) the unemployment rate is still increasing at a rapid pace (9.7% in Aug) and (2) inflation is likely to remain subdued in the near-term due to the substantial slack in resource utilization and stable inflation expectations in the longer-term. Accordingly, we believe the fed funds rate will likely remain unchanged at least
until 2H2010.

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