Markaz:  GCC and Global Markets fall as Fed anticipates higher rates for longer

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Kuwait City, 1 Oct: Kuwait Financial Centre “Markaz” released its Monthly Market Review report for the month of September 2023. Kuwait’s All Share Total Returns Index witnessed a decline in September, posting a monthly fall of 1.6%. The fall was broad based, with all sectors ending the month in negative territory. The banking sector was relatively resilient, losing 1.1% for the month. Among banking stocks, NBK and KFH fell by 1.5% and 1.6% respectively during the month. Arzan Financial Group for Financing and Investment and Gulf Bank gained the most among Premier market stocks, rising by 13.1% and 4.4% respectively. National Industries Group Holding and Jazeera Airways fell by 11.9% and 11.7% respectively during the month.

Kuwait inflation (CPI) accelerated at 3.82% y/y in August, higher than the 3.75% y/y rise in July, driven by the rise in the prices of the food and beverages segment. Domestic credit contracted in August for the second month in a row, down by 0.3% m/m. The monthly decline was driven by a 1% m/m fall in lending to businesses. Real estate sales in Kuwait declined by 20% y/y in August with total sales reaching KD 293 million, owing to seasonal factors and lower demand on the back of high residential valuations and tight financial conditions.

Regionally, the GCC markets were mixed during the month amid the Fed’s hawkish interest rate outlook for 2024. The S&P GCC composite index fell by 2.5% for the month. Despite soaring oil prices, the GCC equity indices except Dubai and Qatar fell during the month, owing to the hawkish stance by U.S Fed to maintain higher interest rates for longer period. Saudi equity index fell 3.8% in September due to the negative effect of the extension of voluntary oil production on the country’s economic growth. According to the IMF, Saudi Arabia’s overall real GDP growth is likely to be lower than the current forecast 1.9% for 2023 owing to the oil production cuts but will remain in positive territory. Major blue-chip stocks – SNB and Al-Rajhi Bank – fell by 8.3% and 6.0% respectively during the month. The Abu Dhabi equity index declined by 0.3%, supported marginally by rising oil prices. The Dubai equity index gained 2.0% for the month supported by the performance of the real estate sector stocks. Emaar and Aldar Properties witnessed a surge of 13.9% and 9.5% respectively after monthly real estate transactions in UAE continued to exhibit robust growth in August. Emaar’s gains were further supported by the news that Eagle Hills Properties and a part of Emaar Group are in talks with the Sovereign Fund of Egypt (TSFE) to buy a major government real estate company operating in the Egyptian market. First Abu Dhabi Bank signed an agreement with Aldar Properties for the sale of FAB Properties to Aldar Estates, which supported Aldar’s monthly gains. Qatar equity index posted a marginal gain of 0.6% as relatively attractive valuations drew interest from foreign institutions.  

Dubai CPI grew by 1.0% y/y in July 2023 compared to 2.05% y/y rise in the previous month, the slowest pace of growth in 17 consecutive months. According to Zawya, Lulu Group International expects to launch its IPO in the first half of 2024, however the size of the IPO is yet to be disclosed. Saudi Arabia’s inflation eased to 2% y/y in August, from 2.3% y/y rise in the previous month. The main driver of inflation remained increasing housing rents which rose 10.8% y/y. Saudi Arabia’s tourism surplus soared to USD 6.08 billion in Q1 2023, 225% higher than the revenues recorded in Q1 2022.

Developed markets’ performance was negative in September with the MSCI World index and S&P 500 indices falling 4.4% and 4.9% respectively. Global markets trended downwards despite the pause in interest rate hikes by the U.S Fed owing to indications of maintaining restrictive monetary policy for a longer period. In line with market expectations, the Fed kept interest rates steady at the 5.25-5.5% range but signaled the possibility of another 25-bps interest rate hike this year. Projections released in the Fed’s dot plot showed the likelihood of two rate cuts in 2024, two fewer than were indicated during the last update in June. The U.S Fed forecasts higher GDP growth rates of 2.1% y/y in Q4 2023 (versus 1% earlier) and 1.5% in Q4 2024 (versus 1.1%). U.S Headline inflation increased to 3.7% y/y in August from 3.2% y/y in July. However, core inflation eased to 4.3% y/y in August from 4.7% y/y in July. The prospect of the Fed keeping short-term rates higher for longer along with healthy economic growth signals helped send longer-term U.S. Treasury yields higher, with the benchmark 10-year U.S. Treasury yield rising by 50 bps and closing the month at 4.59%. The European Central Bank (ECB) raised interest rates by 25 bps, its 10th increases in 14 months. However, ECB signaled that borrowing costs may have reached a peak. Inflation in the U.K. accelerated to 6.d7% y/y in August 2023, from 6.4% y/y in July. However, the core inflation fell to 6.2% y/y in August from 6.9% y/y in July. The Bank of England kept its base rate unchanged for the first time in almost two years at 5.25% after raising it 14 consecutive times. The MSCI Emerging markets index declined by 2.8% in September. The Chinese equity index witnessed a relatively lower fall of 0.3% compared to the MSCI EM index, supported by the series of stimulus measures issued by the Chinese government aimed at reviving the economy and the strained property sector.  

Oil prices rose 9.7% during the month to USD 95.3/bbl., extending the yearly gains to 10.9% despite weaker economic recovery of China weighing down on global oil demand. The rise in oil prices was supported by concerns over tight supply and lower U.S crude oil inventory. Saudi Arabia and Russia have extended their voluntary oil supply cuts of 1 million barrels per day (bpd) and 300,000 bpd respectively, to the end of the year. UBS expects Brent crude prices to stay at USD 95.0/bbl. by year-end driven by the tightness in oil supply. Gold prices declined 4.7% in August to  1,848.3 $/oz due to the strength in the U.S dollar. The U.S. dollar hit record-highs in September after the Fed stiffened its hawkish stance with the projection of one more rate hike before the end of the year.

Global equity markets remain cautious as the Fed Chair has hinted that their base case scenario would not be a soft landing. Trends in core inflation in the coming months could provide an indication of the Fed’s position in November’s meeting. Until then, global equity markets are expected to not exhibit major movements unless economic data releases indicate a major change in global macros. Oil prices are expected to remain relatively strong owing to the voluntary oil supply cuts from Russia and Saudi Arabia. GCC markets are expected to stay in line with global trends, with the Q3 2023 earnings release from blue chips likely providing some direction.

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