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OPEC, Trump and Macron: Market trends in May

Markets appear to be in steady mode these days. Most markets are taking a breather after run-ups late last year, especially following the Trump election in November. The leading markets seem to be in trading ranges now or just stalled near highs, awaiting some catalytic event or a change in economic conditions.

Oil is back above the $50 mark that was broken downward earlier in May, closing the week up by 3.5 per cent at $50.84 per barrel for crude oil and $47.84 per barrel for WTI.

The dollar, too, had a run-up in 2016, but is now actually down on the year against the major currencies (EUR, JPY), even more now after the French election of pro-EU president Macron.

On economic performance, the major economies have spewed soothing data primarily, more or less in line with moderate growth, as per the IMF’s April forecast for world growth of 3.5 per cent.

GCC markets failing to keep pace

GCC markets are lagging, pressured in part by struggling oil prices. Interest rates are still up on the year (US ten-year at 2.3 per cent) but off their recent highs seen after the December 2016 Fed hike.

On the regional front, over the week Qatar was the best performer by +1.7 per cent, breaking the 10,000 point mark, followed by Egypt with a +1.6 per cent with optimism across board after the IMF concluded their visit by signing the second tranche of the $12bn loan.

UAE markets were mainly flat over the week with eyes are now waiting for EMAAR results to be out. Bahrain came in as the worst performer over the week with a decline of -1.8 per cent, followed by Kuwait which was down by -1.2 per cent. Saudi and Oman both were down by -0.6 per cent and -0.8 per cent respectively over the week.

In the absence of major sound news globally and regionally, markets are expected to remain in the range bound trading zone with expected thin volumes.

OPEC could deepen cuts

Upcoming US rate hikes will of course have repercussions for GCC interest rates, where currencies are tied to the dollar and where oil prices are also keenly watched. The latter have been steady in a range under $55 per barrel (Brent) before slipping under $50 in March.

Talk of extending the OPEC and non-OPEC production-cut agreement to the second half of this year is supporting prices, while reports of rising US production and of high inventory levels are pressuring prices lower.

Therefore, the GCC countries are ploughing along with reforms and consolidation, while their finances are looking somewhat better with the higher oil prices this year. That is easing some of the pressure on fiscality and liquidity.

At the same time, most countries are carrying on with their debt issuance programs (domestic and international), the latest being Kuwait’s issuance of an $8 billion international bond (5 and 10-year maturities) in March.

Will Trump’s tax plan stimulate economy?

On the Trump agenda, good and (equity) positive things are still expected: the awaited significant deregulation is occurring (energy, finance), the feared trade wars are not happening; but the wild balloon of massive and immediate tax reform, which pushed the Dow Jones Industrial Index to cross 21,000 in March, lost some of its buoyancy for a time.

Trump and the Republicans are trying to pass radical tax reform in a very contentious political environment. The broad lines of the reform are: a reduction in the corporate tax rate from 35 per cent to 15 per cent, a tax simplification and tax cut for individuals whereby most deductions would disappear, the standard deduction would double and tax brackets would go from seven (with the top tier taxed at 40 per cent) to only three brackets taxed: 15, 25 and 35 per cent.

How much of the US tax plan is realised and what its actual timing is will have significant bearing on the US outlook. One concern is that the financial markets are a bit overly optimistic as to content and timing of the proposed tax plan.

Macron election soothes EU concerns

In Europe, markets have let out a collective sigh of relief after the French election of centrist Macron for president on May 7. Though heavily favoured before the election, the markets waited to see the actual results of the election, having been negatively affected by Brexit and Trump before. The euro and European equities ran up a bit following the results.

Macron is pro-EU and supports free trade, but his policy is more nuanced as he is seeking some protections for Europe’s trade with outside partners. His positions are not very clear at this point and his newly formed party has no MPs in parliament.

So, he will have to rely on the upcoming June election to broaden his mandate and/or work with the mainstream parties to be able to govern. Macron’s election, though not market-disruptive, will still yield policy and implementation questions ahead, though not of the Frexit kind.