Economy

Reem Mansour, MA Economics in International Development Chief Economist/Strategist

Quantitative Ease and Its Impact on Egypt Markets

In its meeting held yesterday, the FOMC decided to delay QE3 tapering on softer inflation and housing data, accompanied with spikes in yield rates. Yield rates are close to 3%-highest in two years- while inflation inched up only 0.1% in August to stand at 1.7% as opposed to 2% set target. The monthly injections of USD85bn (a total of an average of USD3trn over a period of three years), is still not downplaying risks of deflation. It is worth noting that US markets skyrocketed yesterday on the FOMC decision. We however believe that soon enough investors will realize the negative connotation behind this decision where economic challenges still lie ahead of the FED, especially that its three-year sequestration policy has not reaped fruits, yet. This should weigh on the US stock and bond markets performance. But, the emerging markets (EM) have a reason to rejoice, ending its flat performance adopted over the past week, and to continue its upward ride. It is important to pinpoint that Emerging markets are in red YTD even after this rip higher in September (MSCI EM Index down 7.3% YTD). We expect a correction in the US markets followed with a rebound in EM. A snap shot below from Bloomberg highlights the positive correlation between EM and Egypts stock exchange performance. In due cause, we do not see any imminent outside risks on Egypts market. In the local front, the Monetary Policy Committee (MPC) will convene today to decide its stance on its monetary easing policy. We expect a 50bps cut in the overnight deposit rate and lending rate; currently standing at 9.25% and 10.25% respectively. This along with the armys -so far- successful attempts in Keradsah, and the easing of the curfew starting from Saturday should revive interest in Egypts bourse, somewhat ending this weeks sluggish trend. In debt, interest in bonds and T-bills trading in the secondary market should witness heightened activity triggered by the ongoing slashing of yield rates, and fuelled by todays expected interest rate cut. The FEDs decision about QE3 should drive also US T-bills yields downwards, which gives wider room for local yields to be slashed further to 9%, according to our preliminary estimates. Currently local yields are close to its pre-revolution level hovering at an Average of 10.75% for the zero-coupon bonds.

Macro indicators I International

Source: IMF

Source: IMF

Source: IMF

Source: IMF

MSCI EM Index

Source: Bloomberg

EGX30

Source: Bloomberg