NBK Capital Global Markets Commentary – May 2018

Kuwait: June 6, 2018

Global equities in May were unable to maintain their positive momentum shedding 0.2% as measured by the MSCI All Country World Index. US equities in May continued their positive run. The S&P 500 and Dow Jones Index each gained 2.2% and 1.1%, respectively. US markets continued to experience volatility fueled by ongoing talks surrounding trade wars with multiple partners including China, Japan, and the EU, President’s Trump withdrawal from the Iran nuclear deal, and the on-again off-again meeting with North Korea. On the monetary policy front, the Fed met during the month and did not hike rates, although market expectations are still strong for a June hike. In terms of the economy, the Markit Manufacturing PMI in May came in slightly below the previous month, although still above 50 at 56.4. The annualized Gross Domestic Product (GDP) for Q1 2018 on a preliminary basis came in at 2.2% which was slightly below the previous reading of 2.3%. Furthermore, the unemployment rate dropped from 3.9% to 3.8% as per the latest reading in May.

In Europe, the Stoxx Europe 600 in May was also unable to maintain its positive run from the previous month. The index posted a loss of 0.6%. Sub markets, such as Germany’s DAX Index and France’s CAC 40 Index performed poorly dropping 0.1% and 2.2%, respectively. Politics in continental Europe took center stage weighing down on both equity and bond markets. In Italy, the President blocked the government coalition’s pick for the Minister of Economy prompting a potential constitutional predicament and talks of new elections. In Spain, a no confidence vote saw the current Prime Minister forced out of office. In addition, the US voided the exemption on duties afforded to Europe forcing their hand in determining and implementing a retaliation. On the economic front, the Markit Manufacturing PMI and Consumer Confidence figures in May were flat when compared to the previous month at 55.5 and 0.2, respectively. Furthermore, the Consumer Price Index (CPI) year on year for May increased by 1.9% while the CPI-Core increased by 1.1%.
The UK’s equity market in May, like the US, was able to preserve its positive performance from the previous month. The FTSE 100 posted a gain of 2.3%, making it a top performer relative to other developed markets. On the Brexit front, nothing much has changed with the EU chief negotiator claiming that no major progress has been reached since March. The Bank of England opted to not increase rates during their meeting, as was expected by market participants. In terms of economic news, the Markit Manufacturing PMI for the month of May came in at 54.4 exceeding expectations and the previous month’s reading. Also, the Gfk Consumer Confidence for May came in at -7 beating out April’s reading of -9. GDP on a year on year preliminary basis for Q1 came in flat at 1.2%.

Japan’s Nikkei 225 in May posted a loss of 1.2%. Over the past several months, Japan’s economy has been seen as moving in the right direction, growing. Amplifying concerns is the trade war brewing between the US and Japan, as it was the only major trading partner that did not receive an exemption. Towards the end of the month, Prime Minister Abe informed the WTO that Japan was ready and willing to retaliate. During the middle of the month, figures pertaining to Q1 2018 coming out of Japan indicated the economy had contracted for the first time since 2015. Specifically, GDP on a year on year preliminary basis contracted 0.6%. On a positive note, the Nikkei Manufacturing PMI for May came in at 52.8 exceeding expectations and the previous reading, both of which were at 52.5. Furthermore, Consumer Confidence for the month of May came in at 43.8 falling short of expectations yet above the previous month’s reading.

Emerging markets have been unable to put a stop to the losses in their equity markets. In May, the MSCI Emerging Market Index suffered losses of 3.8%, placing its YTD return in negative territory for the first time in 2018. Overall markets have been pushed down by the rise in the US dollar and global geopolitical concerns ranging from elections in Venezuela, the falling apart of the Iran nuclear deal, the uncertainty around the meeting between the US and North Korea’s heads of state, and a brewing trade war between the two largest global economies. The Chinese stock market in May gained 0.4% as measured by the Shanghai Composite Index while the South Korean KOSPI 200 Index dropped 4.0%. In China, the economic atmosphere remains positive given the Caixin Manufacturing PMI and Non-Manufacturing PMI for May were both above 50 at 51.1 and 54.9, respectively. In South Korea, the Nikkei Markit Manufacturing PMI remains below 50 at 48.9, although has increased from the previous month’s reading of 48.4.
Brent Oil in May closed up 3.2% continuing its positive performance for the third month running. On a YTD basis the commodity is up 16%. Supporting the rally in oil’s price during the month were the US’s withdrawal from the Iran nuclear deal and the talk of renewed sanctions, the economic crisis in Venezuela and its effect on production, the increase in demand, and the tightening of crude inventories. A meeting next month between OPEC and non-OPEC countries is expected to address the supply issues. Gold, unlike oil, continues to perform negatively, dropping 1.3% in May.

GCC equities ended the month in the green 0.2% as measured by the S&P GCC Index. The GCC equity markets were dragged down by geopolitical tensions, which weakened investor confidence. The best performing index was Bahrain Bourse’s All Share Index, up 0.6%, while the rest of the equity markets closed in the red. The worst performing index was Dubai’s DFM General Index, down 3.3%, followed by Oman down 2.6%, Qatar down 2.5%, Abu Dhabi down 1.4%, Kuwait down 1.3% and Saudi Arabia down 0.6%. MENA equities, as measured by the S&P Pan Arab Composite Index, closed the month in the red 1.4% with Egypt’s EGX 30 posting negative returns of 10.3%.