Markaz: GCC and Global Markets were positive in July despite interest rate hike by the U.S Fed

 Kuwait Financial Centre “Markaz” released its Monthly Market Review report for the month of July 2023. Kuwait’s All Share Index witnessed an increase in July, posting a monthly gain of 3.2%. Among Boursa Kuwait’s sectoral indices, the Consumer discretionary sector gained the most at 10.3%, while the Technology sector lost 14.6% for the month. Among Premier Market stocks, Arzan Financial Group for Financing and Investment and National Investments Co gained the most for the month, rising by 32.7% and 18.6% respectively. Integrated Holding Co and ALAFCO Aviation Lease and Finance Co fell by 7.5% and 5.6% respectively during the month. 
Central Bank of Kuwait raised its policy rate by 25 bps from 4.0% to 4.25% in July, mirroring U.S. Fed’s interest rate moves. Kuwait consumer price inflation (CPI) accelerated at 3.83% y/y in June, which was higher than May’s inflation figures of 3.69% y/y owing to price increases in food, clothing, and education segment. Food and beverages prices rose by 6.25% y/y while clothing prices inclined by 6.76% y/y during the month. Kuwait recorded a budget surplus of KD 6.4 billion (USD 20.86 billion) in 2022-23 supported by strong oil revenues. Revenues surged by 54.7% compared to the previous year while expenditure declined by 2.6%. 
Regionally, GCC Markets ended the month in green, in tandem with global markets. The S&P GCC composite index went up 3.3% for the month. Qatar and Dubai equity indices gained the most for the month, increasing 8.8% and 7.0% respectively. Qatar’s rally was driven by positive Q2 2023 earnings results for blue chip companies. Dubai extended its rally for the second month owing to lower valuation and positive earnings sentiment. Abu Dhabi and Saudi Arabia equity indices gained 2.5% and 2.0% respectively during the month owing to strong oil prices. Qatar Islamic Bank (QIB) gained 19.4% for the month following the earnings announcement. QIB registered a net profit of QAR 1,955 million in H1 2023, registering a growth of 7.7% over the same period in 2022. 
The Central banks of UAE, Saudi Arabia, Qatar, and Bahrain raised interest rates by 25 bps in line with the policy rate moves of the U.S Fed. The UAE’s GDP growth is forecast to decelerate to 3.9% in 2023 from 7.9% in 2022, primarily due to lower oil production and moderate growth in the non-oil sector, according to the Central Bank of UAE. The oil and non-oil GDP are expected to grow by 3.0% and 4.2% respectively in 2023. Dubai’s CPI slowed down to 2.05% y/y in June after accelerating at 3.05% y/y during May as food and beverages, and transport costs eased during the month. According to S&P Global, UAE’s PMI grew to 56.9 in June from 55.5 in May, indicating significant improvement in business conditions and robust consumer demand. The IMF revised its GDP growth forecast for Saudi Arabia in 2023 downwards from 3.1% to 1.9% on the back of prolonged oil production cuts. Saudi’s CPI accelerated at 2.7% y/y in June compared to 2.8% y/y increase in the previous month. According to MEED projects, GCC project awards surged 86% during Q2 2023, reaching USD 49.7 billion as compared to USD 26.7 billion in awards during Q2 2022. According to IMF, economic growth in MENA is projected to decline to 2.6% in 2023 from 5.4% in 2022.
Developed markets’ performance was positive in July with the MSCI World index and S&P 500 indices gaining 3.3% and 3.1% respectively. Global markets gained despite the interest rate hike by the U.S Fed as moderating U.S inflation and tight labor market bolstered investor confidence that the economy could avoid a recession. U.S. inflation stood at 3.0% y/y in June, sharply receding from the previous month’s figure of 4.0%. The consumer sentiment index rose well above expectations to 72.6, its highest level in nearly two years. The U.S Fed raised its interest rate by 25 bps in the month of July, setting the benchmark overnight interest rate in the 5.25-5.5% range. The Eurozone’s composite PMI stood at 48.9 in July, signaling contraction, down from 49.9 recorded in June. In the month of July, the European Central Bank (ECB) increased its key interest rate for the ninth consecutive time by 25 bps to 3.75%, its highest level since 2001. The ECB did not share any forward guidance about upcoming moves but did raise the possibility of a potential pause in rate increases in September. U.K inflation softened to 7.9% y/y in June, well below the expectations of 8.2% from a poll conducted among Reuters economists. Core inflation remained sticky at 6.9% y/y, despite falling from a 31-year high of 7.1% in May. Economists anticipate the Bank of England to increase interest rate by 25 bps in the next meeting scheduled in August. The MSCI EM index gained 5.8% during the month. 
Oil prices witnessed a sharp increase during the month and settled at USD 85.6 per barrel, recording a monthly gain of 14.2%. Oil prices were supported by tightening oil supply, rising geopolitical tensions between Russia and Ukraine and expectation of increased demand from China. Supply concerns outweighed fears that further interest rate hikes could slow economic growth and reduce demand for oil. Saudi Arabia extended its July’s oil output cut of 1 million barrels per day (bpd) till August, further indicating that the cut could be extended beyond that month. Russia announced it would cut its oil production by 500,000 bpd for August. The production cuts are anticipated to reduce OPEC+ output by 5.16 million bpd in August.  Gold prices gained 2.3% in July to 1,964.2 $/oz despite the interest rate hike of the Federal Reserve.

Global equity markets remained positive in July despite the U.S. Fed rate reaching a 22-year high as the 25-bps rate hike in the July meeting was already priced in by the market. The U.S. Fed has indicated that its decisions are data-driven and on a meeting-by-meeting basis. With the next Fed meeting scheduled for September, U.S. inflation data for July will provide an indication of what could be expected in the next meeting and possibly set the tone for the markets in the next couple of months. Further oil production cuts from Saudi Arabia and Russia that come into effect in August are anticipated to support oil prices. Considering the current economic backdrop and the positive earnings momentum among GCC corporates, investors are expected to remain cautiously optimistic despite downside risk from high interest rates.