NBK Capital Global Markets Commentary – August 2018

Kuwait: Sept 9, 2018

The US and China are still unable to find common ground with the US increasing tariffs on Chinese imports of USD 16 billion bringing the total to USD 50 billion

Global equities in August posted a positive return of 0.6% as measured by the MSCI All Country World Index. In the US, the Dow Jones and S&P 500 each closed in the green returning 2.2% and 3.0%, respectively. The S&P 500 in August recorded its longest bull run ever, since bottoming out in March 2009 during the global financial crisis. Trade war talks continue to take center stage although some relief came to the market as the US and Mexico came to an agreement with respect to revamping NAFTA. The US and China are still unable to find common ground with the US increasing tariffs on Chinese imports of USD 16 billion bringing the total to USD 50 billion. During the month, the Federal Reserve left rates as is although the Fed Chair did confirm during a month-end speech at Jackson Hole that monetary policy would maintain its course of tightening, albeit a cautious one. Gross Domestic Product, on an annualized and preliminary basis, came in at 4.2% while the latest data for Initial Jobless Claims stands at 213,000. The Markit Manufaturing PMI came in at 54.7, still above the 50 mark.

In Europe, markets were unable to maintain their positive run dropping 2.4% in August, as measured by the Stoxx Europe 600. The German DAX Index posted a loss of 3.5% reversing a majority of the gains from the previous month while France’s CAC 40 Index dropped 2.0%. During the month, Greece marked a historic day by becoming self-financing, as a nation, ending its need for external financial assistance from European creditors and the IMF. The European Central Bank remains on track to tighten monetary policy. Consumer Confidence within the Eurozone remains steady at -1.9 while the Consumer Price Index dropped from 2.1% to 2.0% year on year preliminarily. The Markit Manufacturing PMI came in at 54.6, indicating continued growth.

The UK’s FTSE 100 Index in August closed in the red 4.1%. The country remains focused on Brexit with the March 2019 deadline approaching. Discussions with the EU have somewhat stalled pushing the upcoming October deadline, to finalize the divorce terms, to a later date in November according to reports by Bloomberg. During the month, the BOE increased rates from 0.5% to 0.75%, the second time only since the financial crisis, citing both a strong labor market and credit growth. Furthermore, the Gfk Consumer Confidence has improved from -10 to -7 while the Markit Manufacturing PMI is at 52.8 dropping a full point from the previous month.

Japan’s Nikkei 225 continues to post positive returns for the third month straight. In August, the index closed in the green 1.4%. Although Japan signed a trade deal with the EU, a trade war between itself and the US or the US and China remains a major concern. Japan avoided an official recession with economic data showing a rebound for Q2 2018. The Gross Domestic Product annualized for Q2, on a preliminary basis, was 1.9% while the Nikkei Manufacturing PMI was constant at 52.5. In addition, annualized Housing Starts are up slightly in July compared to June.

Emerging markets in August were unable to maintain a positive run for a second month posting a loss of 2.9% as measured by the MSCI Emerging Market Index. China’s Shanghai Composite Index plunged 5.3% while South Korea’s KOSPI 200 Index was able to climb slightly posting a gain of 0.9%. Tensions rising from potential trade wars, mainly between the US and China, continue to put a strain on markets overall. Further weighing down on emerging markets affecting both equity markets and currencies is the turmoil in Turkey surrounding the substantial drop in the value of the Turkish lira, the sanctions by the US on Turkish political figures, and geopolitical concerns. In terms of economic data, China’s Caixin Manufacturing PMI remains just barely over 50 at 50.6 while South Korea’s Nikkei Markit Manufacturing PMI increased to 49.9 from 48.3.

Brent Oil in August recovered some of the losses it sustained in the previous month closing up 4.3%. During the first half of August, Brent’s price was volatile hitting a low mid-month on concerns around Turkey and implementation of sanctions on Iran. The commodities performance rebounded during the second half of the month. Supporting the rally was US crude stockpiles coming in significantly lower than what was expected. Unlike Brent, Gold continues to lose value for the fifth month straight dropping 1.9% in August.

GCC equities ended the month in negative territory, closing down 2.5% in August, as measured by the S&P GCC Index. The GCC equity markets were negatively impacted by the global sell-off amid growing trade tensions despite higher oil prices supporting the markets. During the month, markets closed for multiple days as the region celebrated Eid Al Adha Holdiay. The best performing index was Abu Dhabi’s ADX General Index up 2.6%, followed by Oman up 1.9% and Qatar up 0.6%. The worst performing index was Saudi Arabia’s Tadawul All Share Index down 4.2% followed by Dubai down 3.9%, Bahrain down 1.5% and Kuwait down 0.7%. MENA equities closed the month down 2.3%, as measured by the S&P Pan Arab Composite Index, while Egypt’s EGX 30 posted gains of 2.8%.