NBK Capital Global Markets Commentary – February 2018

Kuwait: March 8, 2018

Global equities in February closed in the negative across the board and experienced heightened volatility

Global equities in February closed in the negative across the board and experienced heightened volatility. The MSCI All Country World Index shed 4.4% while US equities did not fare any better with the Dow Jones and S&P 500 both dropping 4.3% and 3.9%, respectively. On February 5, the Dow Jones experienced its largest intraday drop losing 1,600 points although it slightly recovered and closed down 1,175 points. The intraday drop was a result of market participants pulling back on the fear of faster than expected rising interest rates. Coincidentally on February 5, James Powell assumed office as Chair of the Federal Reserve. Later in the month, Trump inked a massive spending deal ending the year’s second government shut down. Additionally, the market’s expectations for rate hikes increased to four from three. On the economic front, the US’s Markit Manufacturing PMI came in at 55.3, slightly lower than January’s reading of 55.9. The preliminary Gross Domestic Product figure for Q4 was 2.5% on an annualized basis.

In Europe, the Stoxx Europe 600 posted a -4.0% return, for February, wiping out the gains reported in the previous month. The two largest markets in Europe, being the DAX 30 Index and CAC 40 Index, each posted losses of 5.7% and 2.9%, respectively. In Germany, Chancellor Merkel’s party the Christian Democratic Union and the Social Democratic Union (SPD) formed a coalition government. In addition, Fitch rating agency upgraded Greece from B- to B with a positive outlook citing economic growth and reduced political risk positively influencing government debt sustainability. In terms of economics, the Markit Manufacturing PMI for the Eurozone area in February came in at 58.6 vs January’s figure of 58.5. In addition, the Consumer Price Index, year on year, on a preliminary basis was 1.2%, a nominal drop of 0.1% from January.

In the UK, the FTSE 100 continued its negative streak from the previous month, posting a 4.0% loss in February. The sell off from across the Atlantic carried over into the UK with the FTSE 100 reaching its lowest point in over a year. Like the US, rate hike expectations in the UK have increased with the market predicting a rate hike as early as May. On Brexit, a divorce deal has yet to be agreed on and the EU has stated that one needs to be reached quickly otherwise the exit will be a hard one. The UK economy continues to be strong with the Markit Manufacturing PMI coming in above 50 at 55.2 while the Gfk Consumer Confidence slipped 1 full point to -10.

Japan’s Nikkei 225 was unable to continue its positive run through February losing 4.5%. The sell-off in US markets carried over into Japan causing the index to fall by more than 12% from its high in mid-January. The losses sustained in February are not attributable to domestic factors; in fact, corporate earnings are expected to grow during fiscal years 2017 and 2018. In addition, Gov. Haruhiko Kuroda, of the BOJ, will serve a second term affirming the government’s confidence is his abilities to lift Japan’s economy out of stagflation. Like the UK, Japan’s Nikkei Manufacturing PMI came in over 50 at 54.1 which is slightly higher than January’s figure. The Consumer Confidence Index, still below 50, slipped further by 0.3 to 44.3 in February.

In February, the MSCI Emerging Market Index lost more than 50% of its January gain, closing down 4.7%. Unlike most markets, the index started its descent earlier in the month, yet bottomed out on February 9. The two single largest markets comprising almost 46% of the index are China and South Korea. China’s Shanghai Composite Index fell 6.4% while South Korea’s KOSPI 200 Index fell 6.2%. In terms of manufacturing PMIs, both China and South Korea reported figures greater than 50. In China, the Caixin Manufacturing PMI came in at 51.6 while in South Korea the Nikkei Markit Manufacturing PMI came in just over 50 at 50.3.

Brent Oil ended the month on a negative note dropping 4.7%, wiping out 100% of the gains achieved in January. In February, the commodity traded in a range between USD 60pb and USD 70pb with the highest closing price on the 1st of February at 69.65. During the month, crude inventory levels creeped up and US production increased to a point surpassing Saudi Arabia while further narrowing the gap with Russia. Also in commodities, Gold dropped 2.0% in February although still maintains a positive return for the first two months of 2018.

Following a strong start to the year, GCC equities ended February in negative territory. The S&P GCC Index was down 2.7%. The GCC indices overall, much like other global markets, are heavily influenced by US equity markets. A majority of the GCC equity markets closed in the red, except for Bahrain up 1.4%, Kuwait up 0.5%, and Oman slightly up 0.1%. The worst performing index was Qatar’s DSM Index down 6.0% followed by Dubai down 4.4%, Saudi Arabia down 3.0%, and Abu Dhabi down 0.1%. MENA equities, as measured by the S&P Pan Arab Composite Index, was down in February 2.1% while Egypt maintained its positive momentum closing February up 2.9%.