Kuwait: OCTOBER 10, 2019


Trade tensions remain the most potent market mover especially that their effect on both the global and US economies is starting to become increasingly visible.

  • Global Markets took what seems to be a brief break from trade tensions during September and received a welcomed boost from both the Fed and the ECB. The Fed cut its target rate by 25 bps while the ECB resumed its accommodative policy cutting rates by 10 bps and resuming its bond buying program.
  • The MSCI AC World Index advanced by 1.91% in September, while the MSCI EM Index slightly underperformed with an increase of 1.69%. For the third quarter, both indices are down 0.53% and 5.11% respectively.
  • Markets were soon interrupted by serious concerns about the growth in the US economy after the manufacturing numbers showed significant weakness as the ISM manufacturing index dropped to its lowest level since June 2009 at 47.8.
  • GCC markets were largely negative following the attacks on Aramco. The S&P GCC Composite declined by 1.21% weighed down by Kuwait and Abu Dhabi, while Saudi Arabia witnessed a consistent rebound which allowed the index to close the month of September in the green.


In the US, there has been more evidence that economic activity is softening. Most alarming was the manufacturing ISM index, which dropped even further into negative territory at 47.1 in September, and a 10-year low amid heavily contracting export orders and trade pessimism. But also concerning was the decline in the non-manufacturing equivalent to a three-year low of 52.6. Meanwhile, the jobs market remains strong, underpinning still reasonable growth in consumer spending. Non-farm payrolls rose a decent 136,000 in September and the unemployment rate fell to a 50-year low of 3.5%. One concern is that the labor market is a lagging indicator, and that slower business activity will eventually generate cracks in the jobs market that cause the consumer sector to buckle; indeed, the pace of hiring has already slowed from the average of 223,000 per month recorded last year. But at the same time, slower jobs growth need not be a sign of economic weakness if it reflects an economy close to full employment.

Against this uncertain outlook, the Federal Reserve as expected cut interest rates by 25 bps in September – the second cut of the year – leaving the Fed Funds target range at 1.75-2.00%. The move was however interpreted as somewhat ‘hawkish’, with two out of 10 members voting for no cut (though one supported a larger 50 bps reduction), and the bank’s ‘dot plot’ projections pointing to no further rate cuts in 2019-20. It also left its forecasts for growth and inflation next year, at 2.0% and 1.9% respectively, unchanged, implying no strong need for further policy action. Markets however continue to take a different view, pricing in an 85% chance of at least one further cut by end year (probably October).


After delaying twice, Japan decided to stick with its decision to raise its sales tax from 8% to 10% this month – a move aimed at improving its weak public finances – even as growth concerns persist. Indeed, the economy slowed more than initial estimates suggested in Q2 after annualized growth was revised down from 1.8% to 1.3%. The economy continues to face headwinds from weaker global growth and the ongoing trade war between the US and China, which have weighed heavily on Japan’s external sector. Exports fell for the ninth consecutive month in August (-8.2% y/y), while imports declined for the fourth straight month (-11.9%) reflecting ongoing softness in the domestic economy. While the Bank of Japan stood pat on monetary policy last month, it reportedly discussed the possibility of unleashing further stimulus measures in the near-to-medium term to prop up the economy.


It was a mixed bag in terms of economic indicators for the GCC in September. The PMI for Saudi Arabia showed private sector activity continuing to gain traction, improving for the third month in a row to 57.3 on gains in output and new orders. Official data meanwhile showed Saudi non-oil GDP growth of 2.9% y/y in 2Q19 (from 2.1% in 1Q19). By contrast, the UAE PMI continued to ease at 51.1 in September from 51.6 in August, amid weakening domestic demand. Meanwhile Bahrain’s fiscal deficit narrowed by 38% y/y in 1H19 to 3.4% of GDP, on the back of cost-cutting measures and revenue-boosting reforms, including the addition of VAT, under the Fiscal Balance Program. Earlier in September, central banks in Saudi, the UAE and Qatar followed the US Federal Reserve in cutting their benchmark interest rates by 25 bps. Taking advantage of lower rates, GCC bond issuance proceeded apace in September: Abu Dhabi issued $10 billion and Bahrain sold $2 billion worth of conventional/Islamic bonds.