MENA MARKETS REVIEW: JUNE 2018

Kuwait: July 08, 2018

HIGHLIGHTS

Trade tensions continue unabated and are likely to accelerate

  • US equities posted mixed performance in June but were able to end Q2 2018 in positive territory
  • The Federal Reserve hiked its short term rate by 25 bps and signaled a possible two additional hikes by year end
  • Trade wars are taking their tolls on global markets with Europe retaliating with tariffs on US products estimated at USD 3.4 billion
  • Emerging markets continue to bleed in June closing down 8.7% in the quarter
  • Brent Oil continues to perform well up 2.4% in June and up 13% for the quarter
  • GCC equity markets ended the month of June in positive territory supported by MSCI’s upgrade announcements and rising oil prices

TIGHTENING GLOBAL FINANCIAL CONDITIONS AMID TRADE TENSIONS ACCELERATED CAPITAL OUTFLOWS FROM EMERGING MARKETS

Trade tensions continue unabated and are likely to accelerate. As of July 6, the US will apply the 25% tariff on hundreds of Chinese products, and further actions are being considered if China were to retaliate—something that China vowed it would do. Europe has detailed a plan to slap tariffs on $300 bn of US products if Mr. Trump goes ahead with his plan to hit European cars with punitive tariffs. These tensions have raised risks and rattled markets, with China’s stock market and the renminbi coming under severe pressure. China experienced large capital outflows as part of a more generalized phenomenon in emerging markets.

Investors continue to pull out of emerging economies, with outflows accelerating in June, prompted by higher interest rates, a strong US dollar and trade tensions. According to the IIF, the flight to safety from emerging markets increased to $8bn in June following an exodus of $6.3bn in May. These outflows were split evenly between debt markets, recording a net loss of $4.2bn, and equity markets at $3.8bn. Outflows are set to continue in the months ahead with the expected further tightening in the US. Growth in highly indebted emerging markets will take a hit on the back of an appreciating US dollar, and will be compounded by likely further interest rate hikes by the emerging economies as they move to stem the loss of capital.

GLOBAL EQUITIES

Global equities in June continued with negative performance, dropping 0.7%, as measured by the MSCI All Country World Index while Q2 2018 performance is almost flat at -0.1%. In the US, the two major indices had mixed performance with the S&P 500 gaining, for the third month straight, 0.5% while the Dow Jones Index closed down 0.6%. On a quarterly basis, both indices are positive with the S&P 500 and Dow Jones Index up 2.9% and 0.7%, respectively. Trade war talks continue to weigh heavily on market performance. During the month, the G7 met but were unable to find a resolution pertaining to global trade strains. The Federal Reserve hiked its key short-term rate by 25bps and signaled a possible additional two hikes by year-end.