NBK Capital Global Markets Commentary – September 2018

Kuwait: October 8, 2018

Global equities continued their winning streak for the third straight month in September closing 0.3% in the green as measured by the MSCI All Country World Index. For the quarter, the index closed up 3.8%. In the US, both the Dow Jones and S&P 500 were up for the month 1.9% and 0.4% respectively while for the quarter, the indices were up 9.0% and 7.2%. During the month, President Trump was able to come to an agreement with both Mexico and Canada to replace NAFTA with a new trade agreement, while implemented additional tariffs on Chinese products valued at USD 200 billion. The Federal Reserve met towards the end of the month and increased its fed funds rate by 25 bps as was widely expected and provided guidance for potentially one more hike in 2018 and possibly three in 2019. Gross Domestic Product came in at 4.2% on an annualized basis, meeting expectations while both the Markit Manufaturing PMI and Markit Services PMI remained above the 50 mark at 55.6 and 53.5, respectively.

In Europe, markets in September were able to stop the bleeding from the previous month closing up 0.2% while registering a gain of 0.9% for the quarter. The two largest sub-markets within Europe had mixed performances. The CAC 40 Index posted a gain of 1.6% closing out the quarter up 3.2% while the DAX Index closed both the month and quarter down 1.0% and 0.5%, respectively. Towards the end of the month, Italy’s budget, targeting a deficit of 2.4% of GDP over the next three-years, surprised both EU officials and market participants alike. The European Central Bank did not change its monetary policy during its monthly meeting although it did confirm its intention to unwind its monthly asset purchase program starting next month. Consumer Confidence within the Eurozone dropped from -1.9 to -2.9, whereas the Markit Manufacturing and Services PMI each continue to indicate growth with readings of 53.2 and 54.7, respectively.

The UK’s FTSE 100 Index closed the month of September in positive territory up 1.0% while posting a loss of 1.7% for the quarter dragged down by performance in August. Brexit remains the main topic of discussion surrounding the UK and EU. During the month, the EU rejected the latest proposal from UK’s Prime Minister May leaving the split unsettled and moving towards a hard divorce. This has given way to discussions within the UK on a snap election as early as November or even a second referendum. The Bank of England met earlier in the month and kept rates unchanged, as expected, citing concerns related to Brexit. On the economic front, the Gfk Consumer Confidence dropped to -9 from -7 while Gross Domestic Product year-on-year for Q2 grew by 1.2%. The Markit Manufacturing PMI increased from its last reading to 53.8 while the Markit Services PMI slipped to 53.9 from 54.3.

Japan’s Nikkei 225 continued its positive run into September posting its largest monthly gain of 5.5% year to date. On a quarterly basis, the index is the best performer relative to other global indices posting a gain of 8.1%. Furthermore, the index hit an intra-day high during the month, its highest level dating back 27 years to November 1991. Defensive stocks have contributed significantly to this performance in addition to the Bank of Japan’s plans to continue with its accommodative monetary policy. The Nikkei Manufacturing PMI came in at 52.5, slightly below the previous month’s reading of 52.9. The Markit Services PMI retreated from August’s reading of 51.5 to 50.7. In addition, the Consumer Confidence inched up to 43.4 from 43.3, although it remains below the 50 mark.

Emerging markets, as measured by the MSCI Emerging Markets Index, posted a loss of 0.8% resulting in a quarterly decline of 2.0%. This underperformance was a result of major concerns revolving around the US-China trade war and the turmoil in major emerging market economies such as Turkey and Argentina among others. China and South Korea’s main indices performed well in September with the Shanghai Composite Index up 3.5% and the KOSPI 200 Index up 0.2%. On a quarterly basis, China’s index posted a negative return of 0.9% while South Korea’s index broke through into positive territory posting a gain of 0.3%. China has been unable to find common ground with the US in terms of de-escalating a potential all-out trade war and instead retaliated with tariffs of its own on US goods worth USD 60 billion. In terms of economic data, China’s Caixin Manufacturing PMI dropped by 0.6 to 50 while Non-Manufacturing PMI increased to 54.9 from 54.2. In South Korea, the Nikkei Markit Manufacturing PMI crossed the 50 mark to settle at 51.3.

Brent Oil continued to rally posting a gain of 6.8% in September bringing its Q3 performance up to 4.1%. During the month, the commodity reached a high of USD 83.0pb, a level not seen since it began falling in the second half of 2014. Contributing to this rally are several factors including OPEC and Russia’s decision not to increase production to compensate for supply shortages coming from Iran, due to US sanctions, and Venezuela, due to its economic crisis. Gold continues to perform poorly, for the sixth month straight posting a loss of 0.9% resulting in a Q3 negative return of 4.9%.

GCC equities ended the month in positive territory, closing up 0.5% in September, as measured by the S&P GCC Index. On a quarterly basis the Index is up 0.7%. The regional markets were supported by the pick-up in global investor sentiment as well as anticipated capital inflows ahead of Kuwait’s inclusion in FTSE’s Emerging Market Index. The best performing index was Oman’s MSM 30 Index up 2.8% followed by Saudi Arabia up 0.7% and Bahrain up 0.03%. The worst performing index was Abu Dhabi’s ADX General Index down 1.0% followed by Qatar down 0.7%, Dubai down 0.2% and Kuwait down 0.1%. MENA equities also ended the month up 0.6%, as measured by the S&P Pan Arab Composite Index while Egypt’s EGX 30 posted losses of 8.7%.