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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.

The Global Economy in March

Global markets in March were characterized by the impact of the US Federal Reserve (Fed) rate hike, the stalling of the ‘Trump trade’ as healthcare reforms failed in the US Congress and the continuing inflows to Emerging Markets. While the rate hike by the Fed was much anticipated by the markets, it turned out to be less hawkish than expected. Despite the positive US economic data, the Fed retained its outlook at two more rate hikes for 2017.

Emerging Markets ended the first quarter on a high note with sovereign bond sales rising to a record $69.6bn, according to Dealogic, a global research firm. The net value of emerging market fixed income debt held by investment funds also rose to a record of about $350bn at the end of March, according to research group EPFR. The MSCI Emerging Market stock index is up 11.4% the first three months of the year, its strongest quarter since the start of 2012. A weaker dollar also helped emerging market currencies to record their second best quarter since 2012. The data illustrates how investor sentiment has stabilised since the early weeks of President Trump’s tenure in the White House, when his protectionist policies sparked an emerging market sell-off.

The policy promises of President Trump have involved tax cuts and an economic stimulus package that drove the ‘Trump-trade’ –  the post-election rally in US equities. However, the last month saw that rally slowing down over doubts of the administration’s ability to find support in the legislature to push through such policies. The doubts were heightened by the failure in Congress of the healthcare bill, meant to replace ‘Obamacare’.

The post-election US equity rally driven by the new administration’s promises on tax cuts and economic stimulus slowed down in March. The slowdown came as the failure in passing the new healthcare bill in the Congress cast doubt over the administration’s ability in delivering on these promised stimulus.

Elections proved to be positive for markets in March, with the ruling party managing to hold off populist competition for first place at the Dutch elections and Modi’s BJP managing to win overwhelmingly at the Uttar Pradesh state elections. Markets were relieved by not having to deal with another populist win in the West, while celebrating the confirmation of PM Modi’s political capital for economic reforms by accelerating inflows to Indian stocks and bonds. However, last year’s Brexit vote returned to headlines as the British PM officially triggered the two-year process of leaving the EU on the 29th of March, as promised.

Oil prices reversed some of the gains made since the last quarter of 2016, even bringing to question whether it has sufficient support to stay inside the $50 mark. The fall in prices was mainly driven by an increase in US oil production, which offset the effects of the OPEC’s production limitations. The downward pressure on prices has prompted the OPEC to consider extending the limitations beyond June. This helped prices settle within a $50 to $53 range by month end.

The Global Economy in February

Global markets in February were characterised by the – sometimes uncertain – policies of the Trump administration’s first month in office, the chances of the US Federal Reserve (Fed) hiking rates in March and the surge in foreign inflows to Emerging Markets (EMs). The US equity rally stalled initially on fears the administration was losing focus on the promised tax cuts and fiscal stimulus which drove the post-election rally. The President’s March 1st speech to Congress allayed these fears somewhat but finer details are yet to emerge.

For most of February the market seemed to price in a less than 50% chance of the Fed hiking rates in March, mainly due to 2016 record of constant postponement of rate hikes due to external risks, like Brexit. But with Fed officials speaking confidently about a hike, driven by a better global outlook, those chances have been increased to around 80%.

Despite speculations over Fed rate hikes, February saw a continuing surge in foreign inflows to EM stocks and debt. According to data from the Institute for International Finance (IIF), which tracks capital flows, February saw $17bn, in cross-border flows to EM assets with $6.2bn going to equities and $10.9bn to bonds. Analysts say that foreign funds have been attracted mainly to Asian economies with healthy current account surpluses and foreign exchange reserves. The inflows have been aided by a weakening of the US dollar from its post-election highs, partly due to uncertainty over Trump administration policies.

Meanwhile, Europe saw market jitters over the increasing chances of populist Marine Le Pen winning the French presidential elections, due to a series of unexpected events that have affected the mainstream candidates. Chief among these was the nepotism scandal involving centre-right candidate Francois Fillon and his wife. The concerns surrounding Le Pen is that she promises to remove France from the EU, institute a new French currency and redenominate French debt in this new currency. Thus, European debt markets have been jittery, with concerns of a rekindling Greek debt crisis and uncertainty in Italian politics adding in.

Oil prices were largely range bound in the mid-$50s. Price movements within the range were prompted by confirmation of a 90% compliance rate with the OPEC output limitation agreement and rising US shale oil output. Data has shown that the number of shale oil rigs is on the rise and the supply glut is persistent with record US crude oil stockpiles recorded in the month. Last week saw market concern over data showing Russia’s compliance to output limitation amounting to only a third of its promised 300,000 barrels per day.