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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.

THE GLOBAL ECONOMY IN OCTOBER

With Donald Trump as the President Elect of USA, global markets reacted adversely initially, with emerging market equities and currencies moving down, but the panic seems to have faded and most markets are making a turnaround. Yet, it looks like the uncertainty created by the election campaign throughout October and the looming US Federal Reserve December rate hike, will continue. Markets and traders now assign a below 50% chance for a rate hike in December, even though it was high as 70% after commentaries made at  the November meeting of the Fed. The month ended with the uncertainty causing the S&P 500 to go through its longest losing streak since 1980.

The risk-off sentiment in recent weeks caused significant capital outflows from emerging markets (EM). But analysts think that such outflows from India and other EMs represented a short lived phenomenon and that their improving economic fundamentals will allow them to weather the impacts of the Fed hike. China’s yuan reached a six year low in early October, owing to continued outflows and a reduction in exports. In addition, uncertainty roiled Thailand following the death of the country’s King, who was seen as a pillar of stability amidst the political concerns of the country. Meanwhile, Philippine’s stock market reached its lowest since May due to the political uncertainty created by the rash statements of President Duterte.

On the other side of the Atlantic, Brexit continued to be on the headlines as a High Court ruling dictated that the government would need the parliament’s consent on proceeding with the exit from the EU. This saw the pound rebounding from the 31-year low reached during the month to record the best weekly performance since 2009.

Oil prices continued above the US$50 mark for most of October, but started to decline after the market began to lose confidence in an OPEC production cut; the promise of which had caused the rally in prices. OPEC talks in Vienna did not lead to any clear commitments, with analysts pointing to disagreements between Iran and Saudi Arabia. Expectations of oil prices returning to the mid $40s was proven right in the past week, which saw the largest weekly drop since January, aided by a record .

THE GLOBAL ECONOMY IN SEPTEMBER

September was a busy month for markets with a plethora of policy reviews, conferences and data releases. Two events towards the end of the month became the highlights and focus of the preceding weeks; the US Federal Reserve’s policy review on the 21st and the OPEC meeting in Algiers held from 26-28th. On the run up to the Fed policy review investors and traders were slightly risk averse, selling riskier assets in Emerging Markets and in mid-September there were concerns that  the EM rally may be ending, as investors indulged in profit taking prior to the policy review. But some analysts remained confident the rally will continue  and were proven right as the month ended positively for Emerging Market equities, with the Fed’s decision to postpone its rate hike leading to gains. However, given comments made by the US Fed’s Chairwoman Janet Yellen, markets now factor in an above even chance for a Fed rate hike in December.

US and Asia Pacific markets were affected by concerns about the financial health of Deutsch Bank after US authorities slapped a $14 billion fine for wrongdoings in the pre-2008 mortgage market. The concerns have subsided on reports the bank is working on reducing the magnitude of the fine. The uncertainty over the tightening US Presidential elections continued to haunt markets over the month. The first Presidential debate saw Hillary Clinton taking the edge, but the polls keep forecasting a tight race between Clinton and Trump and increasing popularity for alternative candidate Gary Johnson. Global markets, especially EMs, are on edge about the increasing possibility of a Trump presidency.

The October 2nd announcement by British Prime Minister Theresa May to officially trigger Brexit by March 2017  renewed concerns over Brexit as the Pound dropped to its lowest since 1985. She also mentioned no special favors will be granted to the financial sector during exit talks with the EU, increasing angst about the future of London as a financial center.

The other highlight of the month was the OPEC meeting where major oil producing nations agreed to a production cut for the first time in eight years. Oil prices reached the $50 mark for the first time since August following the announcement. Saudi Arabia proved to have made a major policy shift when it allowed Iran, Nigeria and Libya to remain pretty much uncommitted to production cuts. Thus, Iran is seen as the big winner from the agreement. Yet, analysts continue to doubt the ability of the cuts being adhered to and a comprehensive agreement is to be made in November.

 

The Global Economy In August

Throughout most of August global markets were about the continuation of the Emerging Market rally from July as the yield search carried on. Emerging market debt might even reach record levels by end 2016. But the month end was marked by concern that positive US economic indicators would push the US Federal Reserve to hike interest rates in September. The Jackson Hole Symposium on 25th August was expected to provide indications of the direction of monetary policy of the US Federal Reserve’s (Fed), where Fed Chairwoman, Janet Yellen, stated the Fed saw reason to raise rates in 2016. The statement rattled the emerging market rally, as investors became averse to riskier assets. However, the August US non-farm payroll data released on 2nd September has reduced chances of a hike in September, improving sentiment and allowing markets to move up again.

 

Economic indicators, especially Purchasing Managers Indices (PMI), have improved in the Euro region and the UK over the last month, providing some breathing space for Central Bankers and Policymakers. Yet, economic growth in Europe continues to be underwhelming and analysts expect the Pound to depreciate further by the end of the year, due to long term structural issues and uncertainty.

 

Oil prices continued to be volatile within the $40 to $50 range, with July’s fears of supply disruption being replaced by fears of a supply glut building up owing to Saudi Arabia reaching a record summer output. The issues caused by low oil prices were reflected in the Saudi Arabia’s commitment to reaching an OPEC and non-OPEC consensus for an oil production freeze. Russia and Saudi Arabia used the recent G20 summit to come to an agreement to work towards stabilizing the market and the end-September OPEC meeting in Algeria is expected to produce an outcome in this regard. The talk of a freeze created a rally in prices but some analysts are divided as to whether a freeze is feasible or even effective.

 

Within Emerging Markets, the issue of political risk was highlighted by recent uncertainty over the policies of Philippine’s new President, Duterte. Philippines stocks have tumbled following his harsh remarks against President Obama which prompted the US President to cancel a visit to the island nation. Meanwhile, analysts continue to worry about the debt problem in China and see a pattern of investors avoiding Chinese assets to reduce exposure to a possible future crisis. India is going through a transition period as its much respected Central Bank Governor, Raghuram Rajan, hands over the reins to his successor. Some are concerned about reversals in reforms and policies taken by Rajan, but his successor, Urjit Patel, is known to be an avid supporter of his policies.

The Global Economy in July

In the immediate aftermath of the Brexit vote, global market volatility has fallen and the global economy is now steadier than it has ever been. While not everyone will survive the fallout unscathed, Europe shrugged off the Brexit vote, as economic confidence in the EU rose during the month. However, despite the markets’ recovery, some say the uncertainty it created is still a concern. The Bank of England (BOE) cut interest rates for the first time in over seven years, while expanding its bond-buying program, noting that economic indicators had “fallen sharply”.

The Bank of Japan (BOJ) also announced further stimulus measures, albeit less than what was expected by markets. Some say the lackluster measures may mean the BOJ has acknowledged the limits on monetary policy. In addition, the Japanese government announced a 28 trillion yen fiscal stimulus package earlier in July, of which 4.6 trillion yen has been budgeted for the current fiscal year. Analysts say the modest monetary stimulus raises the pressure for the government to deliver on its promise of fiscal stimulus.

The US Federal Reserve (Fed) left rates unchanged last month, while highlighting that risks have diminished. Analysts say this could indicate that economic conditions could warrant further rate hikes in the US.

The constant flow of monetary stimulus has depressed yields in many developed nations, pushing investors to riskier assets in the search for greater returns. Investors have poured a record amount of funds into emerging market bonds and have even turned to emerging market stocks. Indonesian stocks, for example, have benefitted from the investor confidence, amid optimism for growth and reform. Yet, the Bank of America (BofA) notes that it may not be a search for yield, but a search for safety. They note the recent outperformance of government debt even as their yields fell as evidence of this phenomenon.

However, a failed coup in Turkey served as a reminder that the higher yields on emerging market assets come at the cost of greater economic and political challenges. The Malaysian Ringgit has also come under pressure recently, as the nation contemplates further rate cuts to boost growth, amid a political scandal and low oil prices.

Demand for commodities has grown this year, fueled by safe-haven demand, particularly with gold. Yet oil prices have fallen into bear market territory in July, weighed by a revival in concerns that the supply glut in crude oil has returned. While many expect prices to recover by the end of the year, some say they could fall as low as $30 a barrel again. The OPEC has scheduled an informal meeting in September, while stating that it expects the recent price drop to be temporary. Many do not expect much to come from the meeting.

The Global Economy in June

Global markets were shocked on the 24th of June when the results of the UK’s referendum on its EU membership – dubbed ‘Brexit’ – saw a majority in favor of leaving the EU. The volatility and uncertainty that had persisted in the run up to the ‘Brexit’ vote spiked as markets around the world fell dramatically.

However, the market drop did not last long. Emerging and North American markets recovered their ‘Brexit’ losses in the weeks following the vote. This was aided by a number of other factors affecting investor sentiment. Investors favored Asian and Emerging markets as they were seen as being sheltered from the uncertainty affecting European markets, with Jakarta’s stock market leading the rise in South-East Asian stocks.

Europe is expected to remain mired in uncertainty, however, with no clarity on when – or even if – ‘Brexit’ would actually happen. Odds makers still show a significant chance for Britain being a part of the EU by 2020.

Uncertainty over ‘Brexit’ also played a part in the US Federal Reserve’s (Fed’s) decision to hold out on an interest rate hike in June. Analysts now put a greater possibility of a rate cut as opposed to the previously anticipated hike. This has also brought relief to emerging market companies that were expected to find it difficult to pay back $800 billion in maturing debt over the next few years.

In the Middle East, Saudi Arabia has taken steps to sell bonds to foreign investors for the first time. The decision was pressured by the increasing budget deficit created by low oil prices. Meanwhile, Nigeria decided to abandon the peg on the Naira and adopt a free float system, amidst an economic recession due to the oil price plunge. The currency depreciated immensely. But it was accepted by markets gleefully with stocks rising and bond yields falling.

Oil prices were volatile, rising above the $50 mark several times this month. The volatility was caused by fears of supply disruptions in Nigeria and Canada, amid some risk-off sentiment following the ‘Brexit’ vote. Oil traders expect the current price range to persist till the end of the year.

China continues to remain a major concern for markets with a large number of bad loans affecting the banking system in the country. Analysts predict a bailout of about US$ 500 billion might happen over the next two years to recapitalize the banks. It could drag down Chinese markets and the yuan, while increasing government borrowing costs and credit risk. Accordingly, many warn that investors should be warier of China’s economy than Britain’s.