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The Global Economy in January

Global markets started off 2018 on a positive note in January with global stock markets continuing to make gains and emerging market inflows continuing amidst major sovereign debt issuances earlier in the year. However, the month ended giving way to what has been a global equity sell-off in early February, sparked by higher US Treasury yields that have reached multi-year highs. The sell-off started on February 2nd when US yields increased after US payrolls data indicated the highest wage growth since 2009, opening the door for higher inflation and thereby justifying US rate hikes.

On 8th February, the benchmark S&P 500 and the Dow industrials confirmed they were in correction territory, both falling more than 10% from the Jan. 26 record highs. While some analysts have called this sell-off the start of a new era, ending the period of low volatility enjoyed by markets, others see it as closing the gap between elevated asset prices and more sluggish fundamentals.

Emerging markets experienced $4 billion in outflows, mostly from equities, since January 30th according to the Institute for International Finance (IIF) – the largest outflow since the election of President Trump in 2016. South Korea, Indonesia, Thailand have suffered the worst losses so far as of 6th February. However, compared to previous global sell-offs most emerging markets have been faring better, despite the fact that higher US yields make EM risk assets less attractive.

These market movements are in the context of a US Federal Reserve that confirmed its projected rate hike path last week and Jerome Powell being sworn in as the new chairman on the 5th of February. Powell now faces the challenge of ensuring that the economy neither overheats nor goes cold. Moreover, January was also the first full month since the European Central Bank implemented the promise to halve the quantity of its monthly bond purchases to Euros 30 billion.

Brent crude prices were near four-year highs as prices reached $70 a barrel mark early in the year driven by continued optimism that the supply glut was ending this year and due to drops in US stockpiles. However, prices moderated slowly throughout the month, leading to prices reaching $62 a barrel on the 9th of February amidst the ongoing stock market turmoil and a scare about rising global supplies. Iran has announced plans to increase production and US production has surpassed 10 million barrels per day; a level surpassed only by Saudi Arabia and Russia.

The Global Economy in December

December saw the US Federal Reserve carrying out its third rate hike for 2017, as expected, while increasing expectations for US economic growth and forecasting three further rate hikes for 2018. With US inflation remaining low, it appears that the Fed will continue down the current path of gradual monetary policy normalization despite the higher growth expectations, which has been helped by the passing of tax reforms by the Congress.

Looking ahead into 2018, analysts pointed to US tax reforms as possibly causing the US dollar to strengthen in the first quarter helped by US companies repatriating capital held overseas. While the Trump administration appears to see US growth jumping to 4% due to tax reforms, the Fed’s latest minutes show that it sees a much more moderate impact.

As 2017 came to a close the volatility in emerging market stocks seems to have increased, with the 30-day historical volatility on the MSCI EM Index climbing to its highest in almost 12 months. This could have been because investors were caught in a conundrum, stuck between the possibility of global growth driving further EM gains and the risk of tighter monetary policy affecting EM assets, leading some to take profit from the gains of 2017. Nevertheless, the Institute for International Finance noted that 2017 recorded $235bn in portfolio capital inflows to EMs; the highest since 2014.

Pakistan presented an interesting case in December, being able to comfortably raise $2.5bn in dollar debt despite the domestic political uncertainty and balance of payment imbalances, which have prompted foreign investors to move away from Pakistani stocks. Neighboring India has seen the budget deficit for the first eight months of the fiscal year jumping to 112% of the full-year target, prompting increased borrowing and reducing the space for the Modi government to adopt populist policies ahead of the 2019 elections, amidst slower growth.

Brent oil prices stayed above the US$60 mark, with a new two-year high of US$67.02 being reached on the 26th. Prices continued to be held up by hopes of the supply glut ending in 2018, as the OPEC-led group extended the production limitation at their November meeting. Helping prices has been the oil pipeline closures in UK and Libya, a strike by oil workers in Nigeria and promises by Saudi and Russia that any exit from production cuts would be gradual. But gains have been capped by concerns about rising US oil output amidst higher prices.

The Global Economy in November

Global markets in November were affected by a number of noteworthy developments. The latest US Federal Reserve meeting minutes reconfirmed the high possibility of a December rate hike, while Deutsche Bank, Goldman Sachs and JPMorgan Chase have altered their forecasts to the possibility of four Fed rate hikes in 2018. In Europe, some political uncertainty has crept in again due to the failure of Germany’s Angela Merkel to form a governing coalition, opening up the possibility of fresh elections in Europe’s largest economy. In Britain, the Bank of England’s first rate hike in a decade has been followed by renewed optimism about Brexit negotiations after last week’s talks with the EU turned out to be fruitful.

Political risk continued to influence Emerging Markets during the month. Dozens of royals and high officials in Saudi Arabia were detained, which was seen as a centralization of power by Crown Prince Mohammed bin Salman, and raised concerns about the Kingdom’s internal stability. It also coincided with increased tensions between Saudi and Iran in the region. In addition, Venezuela finally defaulted on some of its debt repayments bringing into focus the need for investors to be mindful of the risk they take on. During the end November/ early December period, EM equities have sustained some loses, mainly driven by the technology and energy sectors.

In Asia, analysts have pointed to South Korea’s rate hike as the start of what could be a gradual tightening pattern by Asian central banks taking advantage of the healthy growth rates. Meanwhile, the Indian economy received a boost in the month when Moody’s upgraded India’s sovereign credit rating for the first time since 2004.

Brent oil prices stayed above the US$60 mark, with a two-year high of US$64.27 being reached on November 6th. Driving prices up were geopolitical tensions in the Middle East and optimism on an extension to the OPEC-led production limitation agreement. However, prices have moderated since early November, standing at US$61.22 on December 6th. The moderation has been due to the lack of any major market-moving geopolitical events in the Middle East and on concerns about increasing US oil output amidst higher prices.

The Global Economy in October

October was marked by the implementation of a number of steps towards monetary policy normalization by major central banks and speculation on who President Trump would nominate as the Federal Reserve chairman. The month ended with markets pricing in the nomination of current Fed Governor Jerome Powell, which was confirmed on November 2nd ahead of Trump’s tour of Asia. Powell’s nomination is seen as marking the continuity of Yellen’s gradual rate hike policies and the possible relaxation of some US banking and financial regulations. In the meantime, progress on Trump’s promised tax reforms has increased the optimism for tax cuts happening in 2018 and boosting US growth. These factors helped push markets higher following the nomination.

The month saw the start of the Fed’s balance sheet shrinking process and further confirmation of a December rate hike as US economic data painted an optimistic picture even though inflation continued below the 2% target. The European Central Bank (ECB) cut its bond purchases by half to 30 billion euros on the 26th as expected, but its tone in doing so was very dovish. The ECB kept its options open by continuing the purchases till the end of September 2018 and stating that an extension beyond that is possible if needed.

Meanwhile, the Bank of England hiked interest rates by a quarter percentage point for the first time in a decade to 0.5%, despite weak economic growth in the UK. The Bank has a dovish outlook on future rate hikes and has retained its bond purchasing programs.

China’s Communist Party Congress also occurred in the month, where President Xi Jinping laid out his vision for China up to 2050. With the outgoing central bank governor warning about the level of debt, some are concerned, now that the congress is over, authorities will launch a concerted effort at deleveraging that could slow down the Chinese economy.

Emerging markets saw the return of political risk affecting performance during the month. This was mainly on the back of South Africa’s budget woes, Turkey’s diplomatic row with USA and Germany and Brazil’s tenuous politics. However, according to initial estimates, the Institute of International Finance (IIF) has recorded US$13.8bn in overall portfolio inflows to emerging markets in October. The moderation in inflows from previous months could also be due to rising US yields and a strengthening US dollar.

Brent crude oil prices continued to increase in the month passing the US$60 mark at the end of the month for the first time since July 2015. This was driven by continued optimism over the major oil producers seeking an extension to their production limitation beyond March 2018. Also helping the movement were geopolitical tensions, surprise drops in crude stockpiles and Chinese demand.

The Global Economy in September

September marked a resurgence in the US Dollar, as reflected in the Bloomberg Dollar Spot Index, after a prolonged weakening during the year so far. This resurgence was helped by the increasing likelihood of a December rate hike by the US Federal Reserve, positive US economic data and renewed optimism on tax cuts to be introduced by the Trump administration.

In addition, the dollar was helped by sudden weakness in a number of major currencies. The Euro weakened following the controversy around the independence referendum in Spain’s Catalonian region. The British pound was affected by renewed political uncertainty in UK over Brexit. The Yen weakened as Japan’s PM announced snap parliamentary elections.

Meanwhile, President Trump is to announce his nomination for the next Federal Reserve Chairperson in October. Analysts and betting markets have speculated on who it could be with Gary Cohn and Kevin Warsh among the names being discussed. Markets are concerned about the possibility of someone as hawkish on interest rates as Kevin Warsh having a fair chance of being nominated.

With both the US Fed and the European Central Bank (ECB) talking about reducing their quantitative easing measures amidst the US Dollar strengthening; emerging markets could see some of their gains chipped away. In fact, some report of caution by investors in emerging markets (EMs), with overall inflows slowing down. The Institute of International Finance (IIF) reported that September saw $14.5bn in overall inflows to EM stocks and bonds, the least since January. But many analysts expect to see the emerging market rally continuing.

Brent crude oil prices increased in the month reaching a two year high of $59.02 a barrel on the 25th. This was caused by increased optimism over the OPEC-led oil producers extending their production limitations beyond March 2018 and optimistic demand outlooks by the International Energy Agency and OPEC. Aiding bullish sentiment was the possible shut down of the Kurdish oil pipeline via Turkey amidst controversy over its independence referendum. However, prices have moderated to the mid-$50s since then, with Kurdish supply continuing and the possibility of increased US shale oil supply amidst higher market prices. In fact, US oil exports have increased as the spread between Brent and US crude futures expanded.

The Global Economy in August

The highlight during the month of August was the growing tensions and uncertainty created by North Korea’s aggressive actions; threatening the US pacific territory of Guam, firing a missile over Japan and carrying out its sixth nuclear test – claimed to be a hydrogen bomb. Their actions were met by President Trump’s rhetoric when he threatened North Korea with “fire and fury”.

The rising tensions caused major stock markets to dip while there was increased demand for ‘Safe Haven’ assets like the Yen and Gold. However, markets as a whole have not moved dramatically. As some analysts put it, markets cannot price in an existential situation like a North Korea focused nuclear exchange.

According to the Institute of International Finance (IIF), emerging markets have seen a slowdown in capital flows during August with a $4bn drop from the previous month and the lowest since January. IIF earlier said that while EM investors continue to take on credit risk in search for yield, they appear to have turned slightly negative on EM currency risk despite recent U.S. dollar weakness. US dollar weakness has allowed most EM currencies to appreciate vis-à-vis the dollar.

The search for yield in fixed income assets has seen Tajikistan issuing its first ever international dollar bond with a yield of 7.125%, while the yield on Mongolia’s 2021 dollar bond dropped below 6%. This risk appetite continues even as certain bearish market commentators see EM trades as being crowded and due for a correction.

Markets also focused on the minutes of the US Federal Reserve meeting, which showed that there was disagreement on whether the weak inflation was transitory or not. While some officials claimed that the inflation numbers do not support further rate hikes, others, including the Chairperson, insisted on its transitory nature. September 6th saw the Fed Vice Chair, Stanley Fischer, resigning – effective from mid-October – due to ‘personal reasons’ and increasing the empty seats on the Board of Governors to four.

Brent crude oil prices stayed above the $50 a barrel mark during the month and was majorly affected by three factors. First, prices reduced early in the month as the July OPEC output reached record highs. Second, prices were helped up by supply disruptions in Libya and drops in US stockpiles. Finally, the end of the month saw Hurricane Harvey creating an interesting situation. Despite affecting US oil infrastructure in Texas, crude oil prices reduced due to the reduced demand for crude as refineries shutdown.

The Global Economy in July

July began with a scare of a potential selloff  in emerging market (EM) assets. This was triggered by talk of developed market Central Banks starting to end the era of monetary easing. Alongside the US Federal Reserve’s interest rate hikes and balance sheet unwinding, the Canadian central bank raised rates and the European Central Bank signaled willingness to consider changes to its bond buying program. However, the switch in market sentiment was short lived thanks to Fed Chairwoman Janet Yellen’s dovish statements in her testimony to the US Congress. The outflows reversed and the Institute of International Finance (IIF) reported $20 billion in portfolio inflows to EMs in July.

To some market commentators the episode of EM weakness signaled that international investors were ready to let go of their EM debt investments as soon as global markets wobble. This has prompted fund managers to be cautious of their investments especially in terms of market liquidity giving them space to exit. However, analysts saw the episode as a short period of time in which asset prices adjusted to reflect the hawkishness of developed market central banks.

While Emerging Markets were helped by a weakening US dollar, developed markets were helped by an improving Eurozone economy. In the IMF’s July World Economic Outlook report, it highlighted that global growth in 2017 was being driven by the EU alongside Japan and China. In the meantime it also downgraded US growth outlook slightly, citing the failure of the Trump administration to deliver on its promised fiscal stimulus. The IMF also indicated that the US dollar and British pound were overvalued, relative to fundamentals, while the euro, yen and yuan are seen as being in line with fundamentals.

Brent oil prices made gains in July and increased above the $50 mark reaching $52.65 on July 31st. This was largely driven by higher US demand and reductions in crude oil stockpiles in the US. It was also helped by outcomes of a meeting among major oil producers in St. Petersburg on the 24th, where Nigeria agreed to cap its output and Saudi indicated limits to their exports. But the gains were capped by high OPEC production, primarily due to Libyan and Nigerian output.

The Global Economy in June

The major highlights of the month of June were the events that unfolded around the isolation of Qatar by its Gulf neighbors, developments in the oil market and signs that major central banks were beginning to end monetary easing. Despite these developments, global markets continued the upward trend even as analysts continued to raise questions about its sustainability.

The US Federal Reserve hiked interest rates, as expected, on June 14th for the second time this year and signaled that it will start to unwind its massive balance sheet. However, doubts have been raised whether the Fed will go for a third rate hike this year amidst US economic data falling below expectations in the second quarter. Taking cues from the Fed, the European Central Bank (ECB) and the Bank of England have also signaled that they will begin to end the era of easy money. Emerging Market investors are watching this development closely to see how it affects risk appetite.

Emerging markets continued to see positive investor sentiment, as reflected by a seventh consecutive month of foreign portfolio inflows, up to June. According to the Institute of International Finance (IIF), June saw US$17.8 billion in inflows to EM debt and equities, the majority of which went to the Asian region. Volatility in commodity prices, especially oil, did not appear to trouble EM equities. Analysts have pointed to increasing weight of technology shares relative to commodities-based shares in the MSCI Emerging Markets Index as making this possible. However, some have pointed to robust demand for debt from Russia, Argentina and Ivory Coast as evidence of an investment bubble in high yielding EM assets.

China’s A-shares were finally able to gain entry to the MSCI Emerging Markets Index, from next year. China also opened up its US$9 trillion debt market to foreign fund managers through its new ‘Bond Connect’ service through Hong Kong. Meanwhile, India finally put into force its new Goods and Services Tax (GST) on the 30th of June, promising to simplify the country’s tax regime.

In Europe, Brexit negotiations got underway, while Prime Minister May managed to come to an official agreement with the coalition partner from Northern Ireland. The coalition gives her government a slim majority in parliament. Despite some stability in the parliament, the British economy showed signs of trouble as consumer spending dipped considerably for the first time since Brexit. The Sterling pound also continued to remain weak.

Brent oil prices were rather volatile in June, seeing a drop to the mid-US$40s on fears of a rising supply glut amidst increased OPEC output in May. Despite an OPEC agreement to limit production, the countries excused from it – mainly Nigeria and Libya – have continued to increase output. However, as of the first week of July, prices saw seven consecutive days of gains, rising to near US$50 due to a slowdown in the growth of the US shale oil sector, reduction in US crude oil reserves.  But analysts do not see any support from fundamentals for a sustained rise, reflected in the sharp drop seen on July 5th to US$47.79 a barrel.

The situation over Qatar’s isolation by its Arab neighbors did not have a major impact on oil prices. While the risks of the escalation seem to have reduced, analysts say the crisis is likely to be protracted in its current form. The Saudi-led coalition sent a list of 13-demands, which included ending relations with Iran and shutting down Al Jazeera. Despite Qatar’s rejection of these demands, the Saudi-led coalition have not yet taken any retaliatory measures, raising hopes of the tensions gradually easing out.

The Global Economy in May

The month of May was characterized by political risks affecting markets. Scandals over Russian involvement in the Presidential election and the removal of the FBI director affected the Trump administration, with some politicians even invoking calls for impeachment of President Trump. However, major US equity benchmarks continued their upward movement with only minor impact from the political scandals. Some argue that this is because the ‘Trump Trade’ has been replaced by a liquidity trade fueled by rising inequality and higher profits for firms.

Amidst its usual political uncertainty, emerging markets continued their positive run so far this year, raking in over $20 billion in non-resident portfolio inflows for a third consecutive month in May according data from the Institute for International Finance (IIF). Data from IIF and Dealogic point to over $100 billion in such inflows so far in 2017, driven by nearly $100 billion in sovereign debt issuance by EM countries in the period. EMs were, however, affected by Moody’s downgrading of China’s sovereign credit rating and the fresh political scandals affecting Brazil’s President Temer. Analysts have begun to throw into doubt the sustainability of the EM’s bullish run, citing high valuations of equities and the upcoming US interest rate hikes. In the meantime, Frontier Markets seem to have gained investor interest in the first few months of the year, with increased fund inflows, fueled by political uncertainties elsewhere.

In Europe, markets did celebrate the victory of Emmanuel Macron over the populist Marine Le pen, but now the question remains how he will use a probable parliamentary majority to push through his ambitious reform promises. It is a question well highlighted by the delays facing President Trump’s reform agenda, despite having a republican majority. However, Europe continued to face a number of uncertainties, including the continuation of the European Central Bank’s debt buying program, overcoming Italy’s banking sector problems and finding a suitable compromise with the Greek government on its debt repayments.

But after the June 8th general elections, the future of the Brexit negotiations in the context of a hung parliament in Britain is going to be a major uncertainty. The Conservative Party’s coalition partner, the Democratic Unionist Party (DUP) from Northern Ireland, is likely to push for a ‘softer’ Brexit. The situation is also likely to make the Sterling Pound volatile, after losing  its gains over the last two months on election night.

Oil prices reduced from its mid-$50s height to below $50 during the month due to doubt over the OPEC’s production limitation agreement. Prices did rise as the agreement’s extension to March 2018 came to being, but the market was not impressed by it. Analysts were concerned that oil markets are headed for a supply glut despite the OPEC agreement. Prices have dipped below the $50 mark by early June, helped by the isolation of Qatar by Gulf states led by Saudi Arabia, which could unravel the OPEC agreement.

The Global Economy in April

April was characterized by geopolitical tension triggered by tensions between the US and North Korea as well as in the Middle East. Following the chemical weapons attack which killed dozens of people in Syria, the US launched an airstrike on the country in early April. This put a strain on Russian-American relations as Russia denounced President Trump’s decision to use force in Syria. The following week the US dropped its most powerful non-nuclear bomb targeting an ISIS controlled area in Afghanistan.

Tensions between the US and North Korea escalated during the month with the latter launching ballistic missiles twice. Even though both missile launches failed, it was viewed as a “provocative action” by the country. This led the US to retaliate by taking steps to increase its military presence in the region including staging large military drills with South Korea and Japan. These military interactions in the region caused tensions to rise between China and South Korea as well with China objecting to the deployment of an anti-missile system in South Korea by the US.

Concerns over global trade arose after the Trump administration announced the draft of an executive order withdrawing the US from NAFTA (North Amercian Free Trade Agreement) and after President Trump threatened to renegotiate or terminate the free trade deal with South Korea. However, the administration backed down on its decision to withdraw from NAFTA and later announced that it would look to renegotiate the deal.

In the UK, Prime Minister Theresa May announced an early general election to be held in June this year – 3 years before it is due. Analysts point out that this is a step taken by the PM to ensure strong parliamentary support in the Brexit negotiation process.

The geopolitical tensions in the Middle East buoyed oil prices in the first half of the month. However, increasing US oil production and doubts over an extension of OPEC production cuts weighed on prices in the second half.