NBK Capital Global Markets Commentary – July 2018

Kuwait: August 7, 2018

Brent Oil in July dropped 6.5%, making this the second month in 2018 with negative performance

Global equities in July broke their negative streak closing up 2.9% as measured by the MSCI All Country World Index. In the US, both major indices, the Dow Jones and S&P 500, closed in July up 4.7% and 3.6%, respectively. During the month, several announcements provided support to the markets such as the jobs report and earnings announcements. Talk of trade wars continues to take center stage with US rhetoric on imposing tariffs reaching new highs with regards to both the EU and China. Issues have taken a turn for the better with respect to the EU, yet with China President Trump hinted on implementing tariffs on total Chinese imports of USD 500 billion. Despite the trade issues engulfing the US, Chairman of the Federal Reserve made it clear that rates will continue to rise steadily given the strength of the economy. On a preliminary basis, the annualized Gross Domestic Product (GDP) for Q2 came in at 4.1%, almost double the previous quarters reading. The Markit Manufacturing PMI remains strong above 50 although came in at 55.3 which was slightly lower than the previous month’s reading.

In Europe, markets in July performed relatively well reversing losses sustained in the previous month. The Stoxx Europe 600 increased by 3.1% while sub markets such as Germany’s DAX Index and France’s CAC 40 Index each gained 4.1% and 3.5%. During the month, the EU progressed in its trade discussion with Japan reaching an agreement that would reduce trade barriers between the two partners. On the US front, the EU reached an agreement to halt future tariff hikes with the intention of establishing a long-term solution. The European Central Bank met during the month keeping their monetary policy unchanged and reiterated quantitative easing would end this coming December. According to the Markit Manufacturing PMI for July, the EU’s economy remains strong with a reading of 55.1, unchanged from the previous month. The Consumer Price Index for July increased 2.1% year on year with Consumer Confidence holding steady compared to the previous month.

The UK’s FTSE 100 Index in July was able to reverse its negative performance from a month earlier, closing in the green 1.5%. Brexit remains a major concern with the deadline, to reach a deal with the EU, of March 2019 approaching quickly. During the month, the Brexit Secretary resigned due to his disagreement with Prime Minister Theresa May regarding her approach to remain close to the EU. On the economic front, the Markit Manufacturing PMI came in strong at 54 while the Markit Services PMI came in at 53.5, both of which are above the 50 threshold. The Gfk Consumer Confidence dropped from -9 in the previous month to -10.

Japan’s Nikkei 225 posted a gain of 1.1% in July, marking its second consecutive month of positive gains for the first time this year. Markets continue to worry about a trade war with the US but have received some relief given the agreement reached with the EU. At the end of the month, the BOJ announced that monetary policy would continue with low rates and provided for the first time forward guidance that rates would remain low “for an extended period of time”. In terms of its economy, the Nikkei Manufacturing PMI came in at 52.3 signaling continued growth whereas the Consumer Confidence Index dropped 0.2 to 43.5.

Emerging markets in July broke their losing streak closing in the green 1.7%, the first time since February 2018, as measured by the MSCI Emerging Market Index. Trade war tensions continue to put downward pressure on markets, although the US and EU’s agreement provided some relief allowing the markets to move higher. China’s main index in July, the Shanghai Composite Index, closed up 1.0%, rebounding slightly from last month’s drop of 8.0%. South Korea’s equity market was unable to follow suit, dropping 0.7%, making it the third month straight of negative performance. Economically, China’s Caixin Manufacturing PMI remains above 50 but has dropped by 0.2 to 50.8 while South Korea’s Nikkei Markit Manufacturing PMI continues its drop from 49.8 in June to 48.3 in July.

Brent Oil in July dropped 6.5%, making this the second month in 2018 with negative performance. On a year to date basis, the commodity remains up 11.0%. Market concerns regarding supply and increased production placed downward pressure on prices. Libya, Nigeria, and Canada have either resumed production or increased such, while the US is considering tapping its strategic petroleum reserve. Further applying downward pressure is crude inventory build-up. Gold continues with its negative performance for the fourth month running, closing down in July 2.3%.

GCC equities ended the month of July up 2.7%, as measured by the S&P GCC Index. The GCC equity markets were supported by several factors this month including relatively high oil prices, renewed investor confidence and strong bank earnings. The best performing index was Qatar’s Exchange Index, registering gains of 8.9%, followed by Abu Dhabi up 6.6%, Kuwait up 5.7%, Dubai up 4.8% and Bahrain up 3.6%. The worst performing index was Oman’s MSM 30 Index registering losses of 5.1% followed by Saudi Arabia down 0.2%. MENA equities closed the month up 1.8%, as measured by the S&P Pan Arab Composite Index, with Egypt’s EGX 30 posting losses of 4.7%.