NBK Capital Global Markets Commentary – December 2016

Kuwait: January 4, 2017

Global equities performed well in December with Europe and UK leading the group. European equities rallied this month, up 5.7% as measured by the Stoxx Europe 600, despite the referendum in Italy that witnessed PM Matteo Renzi resign. Further supporting the rally was the positive sentiment surrounding the ECB’s extension of its QE program until the end of 2017. Commodities are mixed for the month with Gold down 2.2% and oil up 12.6% in anticipation of the upcoming production cuts in January by both OPEC and non-OPEC producers.

As the Fed raised interest rates for the first time this year by 0.25%, this signals strength in the US economy, as they move close to their 2% inflation target and improving unemployment. The consumer price index went up to 1.7% YoY.

The December preliminary Markit Manufacturing PMI increased to 54.2, slightly up from November’s 54.1 reading. Consumer confidence rose to 113.7 in December, the highest level seen since August 2011. Durable goods order dropped to -4.6% in November although supported by defense and core capital goods orders. US housing appears to have taken a fall as housing starts dropped further than expected to 1.09 million in November compared to 1.323 million in October. Existing home sales surprisingly improved by 0.7% to 5.61 million, along with new homes sales, which went up to 0.592 million in November.

US equities reported gains of 1.8% this month, as measured by the S&P 500, as the market awaits the upcoming tax cuts and infrastructure spending by the Trump administration.

UK inflation went up to 1.2% in November. Unemployment remains at 4.8% in December, maintaining its lowest level in 11 years. Consumer confidence improved to -7 in December from -8 last month; however retail sales are down to 5.9% YoY in November from 7.4% in October.

UK equities rallied in December posting gains of 5.3%, as measured by the FTSE 100, after last month’s drop of 2.5%. This may be attributed to the phenomenon known as the “Santa Rally” in which share prices rise significantly during the last month of year. The FTSE 100 has been performing surprising well since the Brexit result. However, that could change once Article 50 is triggered next year.

The Eurozone Markit Manufacturing PMI continues its upward trend, reporting a 54.9 reading for the month of December up from 54.1 in November. The preliminary service PMI however has dropped in December to 53.1 compared to 54.1 in November. Consumer confidence in December continues to improve, although still negative, at -5.1. Despite recent events, Europe remains resilient as the upcoming year brings along new challenges with upcoming political elections.

Japan posted a trade surplus for the third consecutive month, although significantly lower at JPY 152 billion compared to JPY 496 billion in October. Imports and exports both fell by -8.8% and -0.4%, respectively. Imports are expected to remain low as the yen continues to depreciate. The Bank of Japan has chosen to keep its short-term interest rate and 10-year government bond yield unchanged. The preliminary Nikkei Manufacturing PMI for December is up at 51.9 compared to 51.3 in the previous month. Japan’s CPI continues its upward trend, up to 0.5% in November. The unemployment rate has also improved slightly to 3.1% in November while Real GDP was down to 0.3% QoQ in Q3.

Japanese equities continue their positive performance up 4.4% in December, as measured by the Nikkei 225 Index.

Chinese imports and exports both recovered from last month’s fall, reporting figures of 13.0% and 5.9% respectively. The CPI also showed signs of improvement at 2.3% in November up 0.2% from last month. The Caixin Manufacturing PMI improved to 51.9 in December compared to 50.9 in November. Emerging markets ended the month almost flat at -0.1%, an improvement from last month while Chinese equities, as measured by the Shanghai Stock Exchange Composite Index, generated a loss of 4.5%.
On the other hand, the GCC equity market ended the month positive, up 3.7%, driven mainly by the rise in oil prices and Saudi’s equity market performance, which was up 3% for the month. In addition, a potential merger between three Qatari banks has driven the Qatar Exchange Index up 6.6% while Abu Dhabi and Dubai equities continued to post gains of 5.5% and 5.1%, respectively.