Global Markets Commentary – August 2019

Kuwait: September 09, 2019

NBK Capital: Boursa Kuwait All-Share Index drops 2.8% in August

KUWAIT, September: GCC markets ended the month of August in the red as the S&P GCC Composite shed 6.23% dragged down mostly by the Saudi and UAE Markets. The largest decline was in Saudi Arabia where the Tadawul All Share Index lost 8.16%, shrinking its year-to-date performance to 2.47%. August witnessed the second and final phase of the Saudi MSCI inclusion which has been already priced-in and wasn’t enough to support the market. Dubai was the second largest decliner with the DFM General Index down 5.47% for the month and Abu Dhabi followed with a 2.86% decline for the ADX General Index. Boursa Kuwait All Share Index was also down 2.87% for the month, while the Premier Market Index significantly underperformed the general market declining by 3.21%. Qatar and Bahrain also saw losses during August declining by 2.59% and 0.94%. Oman, on the other hand, was the only GCC market to end the month in the green closing up by 6.49% which marks its first positive month since September of last year. Egypt managed to strongly outperform with the EGX 30 rebounding by 10.77% for the month.

Markets remained under pressure during the month of August amid continued trade tensions and fears that they would trigger a global slowdown. The MSCI AC World Index retreated by 2.57% in August, while the MSCI EM Index dropped by 5.08% shrinking its year-to-date gain to 1.92% down from 7.38% as of last month. The sharp drop in emerging markets was driven by concerns of slowing growth and trade tensions especially after the downgrade of Argentina and the effect of increased tariffs on the Chinese economy and currency stability.

The effects of trade tensions are starting to reflect into the US economy as the 2Q 2019 GDP was revised down marginally to 2.0% from 2.1% previously and compared to 3.1% for 1Q 2019. The downward revision was mainly driven by a decline in exports and investments, despite stronger consumer spending which was up by 4.7%. Overall, the US GDP is now up 2.6% for the first half of the year. The Michigan Consumer Sentiment Index retreated to 89.8 in August against estimates of 92.1 dropping to a three-year low on concerns that trade wars will negatively impact the US economy. Inflation, on the other hand, remained tame as the Federal Reserve preferred measure, the core Personal Consumption Expenditures (core PCE) recorded 1.6% in July and 1.7% for the second quarter, both below the Fed’s target of 2.0%. Major US indices lost finished the month of August in the red.

The S&P 500 and the Down Jones Industrial Index (DJI) declined by 1.81% and 1.72 during August, while the losses for the tech-heavy NASDAQ were relatively more severe with a decline of 2.60%. All three indices, however, managed to close off their beginning-of-month lows when the S&P 500 and DJI were down by a more than 4.0% while the NASDAQ was down 5.50%. Treasury yields continued their steep decline triggered by the outlook on interest rate levels and intensifying concerns about an imminent recession. The yield on 10-year treasury bonds ended the month at 1.506% down from 2.021% at the end of July. The two and thirty-year yields, on the other hands, have dropped from 1.89% and 2.53% to 1.50% and 1.96% respectively in August.

European markets followed the general direction of global markets and trended down during the month. The Stoxx Europe 600 ended August down by 1.63% after managing to recover most of the losses incurred during the first two weeks when it was down by as much as 5.4%. The same trend was followed by the French and German markets with the CAC40 and DAX closing down 0.70% and 2.05% respectively. Both indices were trading down 5.11% and 6.37% by mid-August before slowly recovering during the second half of the month. On the economic front, manufacturing activity picked up marginally but remained weak with preliminary figures showing the Markit Manufacturing PMI edging higher to 47.0 in August from 46.5 the previous month. The Markit Services PMI, on the other hand, remained robust and recording 53.4 compared to estimates of 53.0 and a previous reading of 53.2. Eurozone inflation remained weak at 1.0% during August, raising market expectations that the ECB will ease monetary policy in September.

In the UK, political tensions intensified on the back of the Prime Minister’s decision to suspend parliament for a period of 5 weeks starting mid-September, which was seen as an attempt to make the MPs’ ability to block a “no deal” Brexit harder. The stock market responded to the new uncertainty by a sharp decline with the FTSE 100 closing the month down 5.0% after failing to recover its losses like its European counterparts. In the meantime, the Gfk Consumer Confidence Index revisited its December 2018 dropping to -14 in August from -11 the previous month, while the CPI surprised on the upside recording 2.1% year-on-year compared to consensus expectations of 1.9% and a previous month’s reading of 2.0%. The Markit Manufacturing PMI, on the other hand, dropped to 47.4 in August from 48.0 in July. The index was expected to show an improvement to 48.4 during the month.

Emerging markets underperformed their global peers significantly with the MSCI EM and MSCI Asia ex-Japan dropping 5.08% and 4.61% respectively. The declines were mainly driven by trade and FX tensions in addition to the downgrade of Argentina. The Argentinian stock market lost 38% in one day after the country’s downgrade to close the month of August down 41.5%. Turkey’s Boursa Istanbul Index was down 5.25%. Other emerging markets fared better with India’s Nifty 50 down 0.85% and Brazil’s Ibovespa Index down 0.67%. Mexico Stock Exchange, on the other hand, gained 4.31% to return to the green for the year with a total year to date return of 2.36%