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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.

The Global Economy in January

Global markets were marked by concern over the policies of President Donald Trump, with signs that the post-election rally in US equities was slowing down. This was even while there was euphoria over the Dow Jones index reaching the record 20,000 level for the first time on January 25th. Markets are concerned that with the recent executive order putting a moratorium on entry into the US for persons from seven majority-Muslim countries, the Trump administration might be expending political capital that could otherwise be used in getting through the promised stimulus package. The US Dollar has descended from its 14-year high, while US Treasury yields have also dropped from the record highs seen towards end-2016.

The uncertainty in the US markets have helped Emerging Markets regain the loses made in the aftermath of the surprise election of Trump in November. Russia and Brazil have seen both their stocks and currencies make gains in the month, helped by the rally in commodity prices, especially oil. However, there is a concern that Trump might persevere with his promises of protectionism, after he formally withdrew the US from the Trans-Pacific Partnership (TPP) dealing a heavy blow to prospects of free trade. This has allowed China to appear as the major proponent of global free trade, with President Xi coming to its defence in his first ever speech at the World Economic Forum in Davos.

However, China has taken renewed efforts to curb capital flight and help prevent a further slide in the yuan. These efforts have even come to affect China’s trade flows, with increased difficulty to furnish payments for imports. Thus, some analysts see China entering a new era of isolationism; far from being ready to take up a role as the leader of global free trade.

Meanwhile in the UK, Prime Minister Theresa May laid out, in a much-anticipated speech, her government’s plans on Brexit. It involved optimism for a good trade deal with the EU and a promise to give parliament a vote on the final deal reached, but there is no clarity as to how such a deal might be achieved. Analysts are concerned that Britain’s post-Brexit economic resilience might come to an end as consumer spending shows signs of slowing down.

OPEC has surprised analysts by sticking to its output limitation quotas, that came into force on January 1st, with some members like Saudi Arabia and Kuwait even reporting output cuts deeper than promised. This has helped oil prices to continuously hold around the mid-$50s. However, the uptick in prices has encouraged US shale oil production to increase and there is concern that OPEC cuts will be offset by increased production in the US.  In the past week, prices have also been pushed up by concerns about tensions between USA and Iran, with a new set of US sanctions being imposed in response to Iran’s ballistic missile tests.

The Global Economy in December

The US Federal Reserve (Fed) raised interest rates for the first time in a year at its December policy meeting. The decision was accompanied by forecasts of three rate hikes in 2017, which was more than the two expected by market participants. On the other hand, the European Central Bank extended its quantitative easing program by another 9 months, while scaling back its monthly bond purchases.

The US Fed’s decision further exacerbated sentiment toward emerging markets (EM), particularly due to a strengthening dollar. However, EM stocks and currencies have benefited from a rally in commodity prices towards the end of the month, while continuing to be hampered by a 14-year high in the value of the US dollar, helped by strong US manufacturing data. Despite the negative sentiment seen towards the end of the year, many EM assets including equities and debt recorded their first year of positive returns since 2012. The gains were mostly driven by a rebound in commodity prices. Nevertheless, they recorded the lowest foreign fund inflows since 2008 particularly owing to concerns around rising US interest rates.

In China, analysts were focused on the depreciation of the yuan to eight year lows after the Fed rate hike announcement. The Chinese central bank has resorted to altering the basket of foreign currencies it uses to decide the official value of the yuan, as a supportive measure. However, the yuan is expected to depreciate further, especially with Chinese citizens’ exchange quote being reset in 2017.

Oil prices have rallied to and stayed in the mid-$50s throughout December, due to the November 30th agreement among OPEC & non-OPEC oil producers to limit their output from January 1st. There are doubts on whether the efforts will be successful in reducing the supply glut given the record outputs that have been seen over the last few months. The number of shale oil rigs in operation in the US has slightly increased, throwing doubt on whether output reduction by the OPEC will be offset by increased output in the US.

THE GLOBAL ECONOMY IN NOVEMBER

November was characterised by the divergent reactions of markets to the surprise win by Donald Trump to become the next US President. US equity benchmarks reached record highs over the month, with the Dow Jones Industrial Average reaching its highest ever, while the yield on US Treasuries jumped to record levels amidst a global bond selloff. The US dollar continued to strengthen throughout the month. These were catalysed by market sentiment that Trump’s policies will boost US fiscal spending and increase inflation, forcing the US Federal Reserve to increase the pace of its rate hike process. However, the rally seems to have lost steam towards the end of the month, with questions about whether it was overdone.

On the other hand, Emerging Markets (EMs) were severely affected by the uncertainty over the impact of Trump’s protectionist policies and risk-off sentiment affecting high risk EM assets. Fund outflows from EMs have been estimated to be around $24bn since the election. Several EM central banks and governments were forced to intervene in order to prevent their currencies from depreciating to record levels amidst outflows and the strengthening dollar. Among them Malaysia sought to control currency trading and Indonesia followed the traditional central bank intervention of selling dollars to the market. Although most Asia Pacific stock markets saw loses from the uncertainty, Japan’s benchmark Topix reached its highest since early 2016 thanks to a weakening yen boosting Japanese exports.

Indian Prime Minister Modi’s surprise demonetization of the 500 and 1000 rupee notes on November 8th has led to a frustrated public struggling to convert their cash and has created a liquidity crunch that could cost as much as 1% of India’s GDP. Analysts expect Indian corporate earnings to drop in the short term, but see the process boosting bank deposits.

In Europe, attention was on more elections and referendums. Italy’s constitutional referendum on December 4th was the highlight and saw a resounding ‘No’ vote causing Prime Minister Renzi to resign on Monday. The market reaction was largely muted, but Italy faces the risk of a banking crisis, credit downgrades by ratings agencies and the emboldening of its populist parties. Austria managed to hold back the populist wave on Sunday, denying the right-wing anti-immigrant candidate its Presidency.

Oil prices rallied last week to record the best weekly gains for Brent crude since 2009, following the OPEC agreement on November 30th on production cuts. The agreement outlined the individual commitments made by each state, including non-OPEC Russia and Oman. It was made possible by Saudi Arabia agreeing to concede to concessions to Iran to increase its output to pre-sanctions levels. However, analysts continue to doubt the impact of the agreement in terms of adherence to the limitations and increased output by US shale oil producers.