KFIC Report for the Global and GCC Financial Markets in June
Global equity markets rise during the second quarter of 2017 as the MSCI World Index gained +3.38%. Japan’s Nikkei 225 index was the top performing Index, followed by the Dow Jones Industrial Average. In the US, S&P 500 climbed +2.57% QTD as retail sales increased +0.4% in April (forecast was 0.6% rise) after a 0.1% increase the prior month (revised from 0.2% decline) and US consumer confidence index rose to 97.7 in May (forecast was 97) from 97 in April. The US Federal Reserve also raised short-term interest rates to 1.25% from 1.00% amidst an improvement in the US economic conditions.
In Europe, Germany’s DAX index increased by +0.1% QTD ECB president Mario Draghi gave the strongest suggestion that the central bank is not yet ready to relax its fiscal stimulus policy, despite better economic growth across the Eurozone, which caused the euro to turn lower against the dollar. France’s CAC 40 closed flat by 0.04% after French President Emmanuel Macron’s upstart party scored a majority in parliamentary elections, which brings more optimism into the French economic reform policies. UK’s FTSE 100 declined -0.14% as the U.K formally begins EU exit. According to S&P ratings agency, Britain continues to be overshadowed by political uncertainty, which may lead to a negative effect on foreign investment in the UK following fears over Brexit. However, Pound strengthened against the USD after Prime Minister Theresa May announced in April 18 to hold snap elections in June 2017.
In China, Shanghai’s Composite Index decreased by -0.93% QTD as Moody’s downgraded China’s rating to A1 from Aa3 and changes outlook to stable from negative. Meanwhile, China A shares entered the MSCI Emerging Market index with a small factor of 5%, which constitutes 0.73% of the benchmark. Analysts are expecting the country to take longer than its peers for full inclusion, which could eventually drive USD 340 billion of foreign capital. This could approximately account for 11% of the A-share’s market capitalization, into China, according to MSCI’s estimates.
In Japan, Nikkei 225 increased +5.95% as exports rose +14.9% in the last quarter compared to last year mainly due to an increase in shipments of cars and steel. In Commodities, oil prices continued to slump during the second quarter as WTI dropped -10.88% QTD to close at USD 46.0 bb/l and Brent fell -9.84% QTD to close at USD 48.8 bb/l. Crude oil posted consecutive weeks of losses as OPEC members failed to agree on production cuts to reduce the supply glut. Gold prices declined by -0.62% QTD and Silver fell by -8.97% QTD due to subdued demand of precious metals from jewelers, retailers and industries.
GCC Economic Overview
Saudi Arabia and other Arab countries cut diplomatic, economic and transportation ties with Qatar, accused of having links to terrorism and working against the interest of the Gulf nations. Qatar has strongly denied the accusations as lacking factual basis. Saudi Arabia, the UAE, Bahrain and Egypt sent Doha a list of 13 demands, including closing the state-funded Al Jazeera News network as conditions to normalizing relations. Kuwait’s Amir Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah continues to play a major role in mediating relationship between the Gulf countries by visiting Qatar, Saudi Arabia, and UAE in efforts aimed at resolving the diplomatic rift.
In other news, Saudi Arabia’s King Salman has appointed his son Mohammed bin Salman as crown prince, replacing his nephew, Mohammed bin Nayef. During the month, MSCI decided to include Saudi Arabia on its watch-list for potential addition to Emerging Market Index as The Kingdom showed significant willingness to improve stock market regulations and easing conditions for foreign investors.
In the UAE, The Emirates NBD UAE Purchasing Managers’ Index (PMI), a key indicator of the health of the UAE’s non-oil private sector, fell to 54.3 from 56.1 during the quarter amid a slowdown in demand for exports. In Oman, S&P has lowered its long-term rating to BB+ from BBB- with a “negative” outlook, which officially places Oman in junk category.
The rating agency estimated that Oman’s net external asset position has fallen to 30% of its current account, from 60% a year ago. Bahrain, having the largest fiscal deficit, has been unable to reduce the decline in its foreign reserves; according to a new research note from Bank of America Merrill Lynch Bahrain is one of the most vulnerable oil exporters as oil prices strain the smallest economy in the gulf.