NO RELIEF FOR CRUDE OIL PRICES BEFORE THE OPEC MEETING
As noted in last week’s Money Matters, oil prices came under pressure due to various factors, one of them being the POTUS’ wish for lower oil prices. Crude oil prices continued to tumble during the week, and as a result, the per barrel price of both Brent and WTI for January delivery dropped 10-11%, hitting USD 50.4 and USD 58.8, respectively. President Trump has already celebrated lower prices by tweeting ‘Oil prices getting lower. Great! […] Thank you to Saudi Arabia, but let’s go lower!’ OPEC will be meeting to discuss and coordinate the strategy of the cartel on 6th December. Until then uncertainty is unlikely to fade in the oil market which implies that volatility is likely to remain elevated.
The economic diary contains plenty of relevant and potentially market-moving releases within the developed space for the week. The US is going to reveal the second read of the Q3 GDP figure, PCE inflation measures for October (the Fed’s preferred gauge for inflation) and the minutes from the FOMC’s last monetary policy meeting. Meanwhile, ECB policymakers, including President Draghi, will give speeches. Furthermore, November inflation statistics will be published for the Euro Area.
Several important macroeconomic indicators are scheduled for this week. In Asia, Vietnam releases the monthly macroeconomic indicators for November, China reveals the November manufacturing PMI, while India published Q3 GDP statistics. Latin American markets will mainly focus on Mexican retail sales growth in September, the Brazilian current account and Q3 GDP, and on the monetary policy meeting of the Colombian central bank. Within the African space, Kenya will be the most active in terms of relevant data releases, as the country is scheduled to publish CPI inflation for November, while its central bank may decide on the policy rate.
S&P 2,633 -3.79%, 10yr Treasury 3.06% -2.38bps, HY Credit Index 417 +18bps, Vix 21.52 +3.38Vol
US stock markets struggled during the week, as most of the major indices finished the week down. The S&P 500 decreased 3.8%, while the Nasdaq Composite plummeted 4.3%. As a result, the S&P 500 has shrunk 1.5% since the beginning of the year. In contrast, the Nasdaq Composite is still in positive territory year-to-date, albeit barely. From a sectoral point of view, IT and energy companies struggled the most, as their respective indices decreased 6.1% and 5.1%. There were no obvious catalysts for tech stocks during the week, while energy stocks were obviously driven by the sustained and substantial decline in crude oil prices. The Brent for January delivered slipped to USD 50.4/bbl (-11% WoW) and the WTI for January delivery dropped to USD 58.8/bbl (-11.9% WoW).
The number of housing starts in the US rose to 1.23mn in October, while the September figure was revised up to 1.21mn. From a regional point of view, housing starts bounced in the South, which is a likely consequence of the damage brought by Hurricane Florence. Meanwhile, building permits fell in October vs. a month ago.
Eurostoxx 3,137 -2.03%, German Bund 0.37% -2.70bps, Xover Credit Index 327 -17bps, EURUSD 1.137 +0.67%
Bleak economic figures, an ECB ready to start the withdrawal from monetary stimulus and political tensions within the EU weighed on European markets. The respective indices of the big four Euro Area economies decreased in a range between 1.5-2.2% in USD. The risk-averse market sentiment dominated the European fixed income space while German Bund yields eased, bringing the 10-year tenor down by 3bp to 0.34%.
The minutes of the European Central Bank’s (ECB) last monetary policy meeting revealed that the Governing Council acknowledged mounting risks to the Euro Area’s growth outlook stemming primarily from the external environment. The Council concluded that although the forecast horizon has become less promising, the balance of risk to GDP growth remain broadly neutral. Recently in his speech, ECB President Mario Draghi echoed the same concerns.
The President suggested that economic confidence in the Eurozone has somewhat dissipated compared to his public statements during previous press conferences held after the ECB’s regular rate setting meetings. Although the President claimed that certain data reflected unexpected weakness, he stuck to the conclusion drawn by his fellow Council members, i.e. risks to the growth outlook remain broadly balanced.
Purchasing manager indices (PMI) within the Euro Area declined across the board. The most noticeable move was seen in the manufacturing PMIs trajectory, as it shrank to 51.5 in November. The headline figure itself signals the expansion of manufacturing output in the Eurozone, the pace of expansion however, has been slowing.
The Governor of the Bank of England, Mark Carney claimed that UK Prime Minister May’s Brexit deal draft could limit downside risks to economic growth, whereas a Brexit without any deal would deal a considerable blow to the UK’s economy.
HSCEI 1,049 -1.76%, Nikkei 2,181.00 -0.26%, 10yr JGB 0.09% 0bps, USDJPY 113.290 -0.02%
The decrease in the MSCI Asia Pacific ex. Japan index reflected the broad weakness in the Asian universe, as the broad benchmark decreased 1.4% in USD. Chinese ‘A’ shares, the Korean market and the Sri Lankan index received the greatest blow, as they contracted 3.9%, 3% and 2%, respectively (all in USD). In such a challenging environment, the Philippine, Vietnamese and Bangladeshi markets served as havens, as each gained during the week.
Annual Thai GDP growth slowed to 3.3%, while on a quarterly basis, the Thai economy stalled in Q3. In comparison, the economy grew 4.6% YoY or 0.9% QoQ SA in the previous quarter. Economic activity weakened in Q3, due to the unexpected contraction of exports (-0.1% YoY), while growth of imports volume rose to 10.7% YoY. Other components remained solid, as domestic demand further strengthened in Q3: household demand growth accelerated to 5% YoY, public consumption rose 2.1% YoY, gross fixed capital formation increased by 3.9% YoY. In light of the GDP Q3 data, The Thai Planning Agency downgraded its growth forecast for 2018 to 4.2% from 4.2-4.7%.
GDP data from Q3 was weaker-than-expected and could imply that GDP growth in the whole year may be closer to 4% than to 4.5%.
Thai exports bounced in October, rising 8.7% YoY after contracting in September. Since the beginning of the year, total exports rose 8.2% YoY. Meanwhile, imports grew 11.2% YoY in October, bringing the YTD growth rate to 14.8% YoY. As a result, the foreign trade balance turned to deficit in October, as it was USD -0.3bn, compressing the year-to-date trade surplus to USD 2.6bn.
Headline CPI inflation in Malaysia rose to 0.6% YoY, as the rate was lifted by the low base a year ago relative to the annual rate of consumer price increases of 0.3% September. Core inflation was marginally higher than in the previous month, as figures rose 0.1ppt to 0.4% YoY. Inflation in Malaysia remains depressed due to the prolonged impact of abolishing the Goods and Services Tax’s (GST). Although the GST was replaced with the Sales and Services Tax in September, it has barely lifted inflation metrics thus far.
Growth of Taiwanese industrial production hit 8.3% YoY in October, bouncing from September’s 1.6% YoY. The growth spurt was primarily driven by electronic devices, i.e. smartphones.
MSCI Lat Am 2,558 -4.09%
Latin American markets had a challenging week since the vast majority of the indices headed south, captured by the broad MSCI EM Latin America index decreasing 4.1% in USD during the week. The Argentine and Colombian markets decreased the most as the respective indices contracted 5.4-5.5% in USD. In relative terms, Chile outperformed as the countries stock index shrank to the smallest extent by 1.9% in USD.
The current account deficit of Chile reached USD 3.4bn in 2018 Q3 (vs. USD 1.2bn a year ago), while the 4Q-rolling deficit rose to about 2.3% of GDP (about USD 6.3bn). The deficit widened in Q3 mainly due to the deficit on the income balance.
The Chilean economy grew by 2.8% YoY in 2018 Q3. Since the beginning of the year, Chilean GDP expanded by 4.2% YoY. The annual growth figure in Q3 was negatively impacted by a calendar effect. The Q3 GDP figure was led by private consumption and investments (7.1% YoY) however Net exports negatively contributed due to lower copper production and higher imports.
Despite the slowdown in Q3 the Chilean economy is set to expand by 3.8-4% this year. Next year, GDP growth may be in the range of 3.5-4% depending on the degree of headwinds the economy will face such as international trade tensions, domestic consumer confidence, etc.
Argentina’s primary fiscal deficit shrank to ARS 16.6bn in October, almost 50% narrower than the deficit registered a year ago. The 12-month rolling primary deficit was around 2.4% of GDP. Consequently, the Treasury is on track to meet the fiscal deficit target for this year, which is set at 2.7% of GDP. In contrast, the headline budget deficit increased to 5% of GDP in October, up from 4.9% in September, due to a higher interest burden.
Mexican headline inflation was 4.6% YoY in the first two weeks of November, vs. 4.9% two weeks before. The deceleration was driven by both core and non-core component. A technical factor contributed to a slower annual rate, as the weight of energy decreased within the consumer basket.
According to the Mexican Statistics Office, the second read of Q3 GDP growth in Mexico was revised downwards by 0.1ppt to 2.5% YoY (0.8% QoQ SA). GDP growth was primarily driven by services activity (3.2% YoY), while industrial production growth slowed to 1.1% YoY. Agricultural output increased 2.2% YoY.
The Mexican economy is set to hit the 2% mark in terms of real GDP growth in 2018. No significant acceleration is expected in 2019 in terms of real GDP growth.
MSCI Africa 755 -0.30%
The broad MSCI EFM Africa index went sideways during the week (in USD). Egypt was one of the brightest spots within the African universe, as the country’s stock index rose 0.4% in USD, while its Ghanaian peer lost 4% of its value in USD. The South African market underperformed as well, since the South African index dropped by 2.02%.
According to the International Monetary Fund (IMF), South Africa’s plans to aid economic recovery are constrained by the rising debt load of state-owned enterprises and by capital outflows. The IMF projects South Africa’s GDP growth to slow to 0.8% in 2018, broadly in line with the forecast of the country’s government at 0.7%. The IMF added that the impending reform to amend property laws and to address land expropriation should be carefully carried out, as bad implementation could easily hurt agricultural productivity.
South African headline CPI inflation accelerated to 5.1% YoY in October, from September’s 4.9% YoY. The pick-up in the headline figure was mainly due to the impact of elevated fuel prices. Meanwhile, core inflation remained 4.2% YoY.
In order to counter further acceleration of the headline inflation rate, the central bank of South Africa lifted the policy rate by 25bp to 6.75%. The MPC argued that tighter monetary conditions are needed to prevent the de-anchoring of inflation expectations.
Depending on the trajectory of headline CPI inflation, the MPC might continue hiking the policy rate in the coming quarters. However, the room for further tightening may be limited as a significantly higher policy rate could choke the country’s frail economic momentum.
Egypt’s budget deficit was 1.9% of GDP in FY2018-19 Q1 (or 2018 Q3), according to the country’s finance minister. The deficit slightly decreased compared to the same period a year ago, when it was 2% of GDP. The government remains on track with its economic reform programme to meet the requirements set by the IMF.
The central bank of Nigeria left monetary policy conditions unchanged at its last rate setting meeting. As a result, the policy rate remains 14% with an asymmetric interest rate corridor of +200/-500bp around the policy rate. According to the Monetary Policy Council, Nigerian GDP growth outlook is positive despite the depressed credit dynamics to the private sector.
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