Global economy and markets

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1 Global economy Research Department ARC Research Team Tel: , Global economy and markets The IMF recently lowered its forecasts for global GDP growth to 3.2% (from 3.4%) for 2016, and to 3.5% (from 3.6%) for Economic indicators of the global economy witnessed a relatively better performance in March. US Q GDP growth rate was revised upward to an annualized rate of 1.4%, as compared to 1% previously. Manufacturing sector entered expansionary phase as ISM manufacturing index rose above the -benchmark, while services sector picked up in March. Non-farm payrolls numbers beat analysts estimates. In the Eurozone, economic activity expanded at a modest pace, as Eurozone composite PMI rose helped by expansion in manufacturing sector. UK s PMI numbers for manufacturing and service sectors also rose in March. Meanwhile, most of Asian economies witnessed improvement as well. China s manufacturing PMI rose, although slightly below the -mark level, and services sector also improved moderately. Both manufacturing and services sectors expanded at a solid pace in India as well. However, manufacturing activity in Japan contracted in March, while services PMI fell to. On the policy front, the RBI eased its monetary policy, whereas the Fed, ECB, BoE, BoJ and PBoC kept their monetary policies unchanged. In commodities, crude oil prices recorded monthly gains backed by continuous talks of an output freeze by major oil producers. Meanwhile, the US dollar weakened against all major currencies. On the equity market front, the MSCI global equity index advanced 7.2% m-o-m in March, backed by strong commodity prices and expectations of a delay in rate hike by the US Fed. Global economic data: As per revised (third) estimates, US economy s Q annualized GDP growth rate was revised upward to 1.4%, against earlier figure of 1%. The ISM manufacturing index rose to 51.8 in March, while inflation eased down to 0.9% y-o-y. The Eurozone Composite PMI inched up to 53.1 in March, as compared to 53 in February, while the inflation stayed flat y-o-y in March, as compared to -0.2% in February. As per final estimates, UK s Q4 GDP growth rate was revised up to 2.1% y-o-y, the same rate as in Q Manufacturing PMI ticked up to 51 in March, while CPI rose 0.5% y-o-y over the same period. Manufacturing activity in Japan contracted during March (PMI reading of 49.1), while inflation edged up to 0.3% y-o-y in February. The Caixin China General manufacturing PMI rose to a 13-month high reading of 49.7, while inflation remained stable at 2.3% y-o-y in March. The Nikkei India manufacturing PMI moved up to 52.4 in March, versus 51.1 in February, while annual rate of inflation eased down to 4.8% y-o-y, as compared to 5.3% in the previous month. Monetary policy: The US Fed decided to leave interest rates unchanged in the range of 0.25% - 0.5%, at its meeting held on March 15-16, It cited global economic slowdown and volatility in equity markets as primary reasons supporting its decision. Meanwhile, the RBI reduced its repo rate by 25 bps, whereas the ECB, BoE, BoJ and PBoC kept their monetary policies steady. Markets: In commodity markets, crude oil prices (Brent) jumped 8.3% m-o-m to US$40.33/bbl at the end of March 2016, while natural gas (Henry hub) prices climbed 14.5% m-o-m to US$1.96/mmbtu. However, gold prices edged down 0.5% m-o-m in March, whereas silver prices rose 3.6% on a monthly basis during the same period. Meanwhile, the US dollar declined against all major currencies in March. 1 Please see penultimate page for additional important disclosures. Al Rajhi Capital (Al Rajhi) is a foreign broker-dealer unregistered in the USA. Al Rajhi research is prepared by research analysts who are not registered in the USA. Al Rajhi research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer.

2 IMF cuts global GDP growth forecasts for 2016 and 2017 to 3.2% and 3.5% respectively The US Q GDP growth rate was revised upward to an annualized rate of 1.4%, from 1% previously estimated The ISM manufacturing index entered the expansion territory for the first time in six months, whereas CPI rose 0.9% y-o-y in March Global economic data IMF downgrades global GDP growth outlook for 2016 As per recent World Economic Outlook report, the IMF lowered its global GDP growth forecast to 3.2% in 2016, down from previously estimated 3.4%. For 2017, it estimates that the global economy will grow at a rate of 3.5%, as against prior forecasts of 3.6%. The report highlighted that economic slowdown in China as well as low oil prices pose risks to global growth outlook. Among advanced economies, US and Eurozone are expected to grow moderately, whereas Japan is forecasted to register marginal negative growth in 2017, largely due to planned increase in consumption tax. In emerging economies, China is predicted to grow at 6.5%, backed by the stimulus measures taken by the country, while India is expected to record a growth of 7.5%, driven by private consumption. United States As per the third estimates released by the Bureau of Economic Analysis, the US economy grew at an annualized pace of 1.4% in Q (up from 1.0% as per second estimates), as compared to 2% in Q An upward revision to the Q GDP growth rate was mainly supported by higher than previously estimated increase in personal consumption expenditures and exports, which outweighed the downward revision to private inventory investment. Real time indicators: According to the ISM, the manufacturing sector in the US witnessed an expansion for the first time in six months, as the manufacturing index rose to 51.8 in March, from 49.5 in the previous month. The rise in the index was primarily backed by surge in new orders and production for the third consecutive month, along with an increase in exports. The services sector also grew at a slightly faster pace in March, as the non-manufacturing index stood at 54.5 in March, up from 53.4 in the previous month. The non-farm payrolls figures were recorded at 215,000 in March, above the consensus estimate of 205,000, but below the previous month s revised reading of 245,000. Inflation stood at 0.9% y-o-y in March, marginally down from February s reading of 1.0% y-o-y. Growth in auto sales eased down during March, registering an increase of 3.1% y-o-y, versus 6.6% y-o-y in the previous month. Figure 1 US ISM PMIs Figure 2 Non-farm payrolls Thousand Mfg ISM Non-Mfg ISM Non farm payroll 2

3 Figure 3 US auto sales growth trend (y-o-y) Figure 4 US retail sales growth trend (y-o-y) 2 6.0% 15.0% 5.0% 1 4.0% 5.0% 3.0% 2.0% -5.0% 1.0% US Auto Sales Adjusted Retail & Food Services Sales Figure 5 Inflation trend YoY 2.7% 2.2% 1.7% 1.2% 0.7% 0.2% -0.3% Figure 6 10-year US treasury yield 3.5% 3.3% 3.1% 2.9% 2.7% 2.5% 2.3% 2.1% 1.9% 1.7% 1.5% US CPI US 10 year treasury yield Economic activity in the Eurozone expanded at a moderate pace in March, while the CPI remained unchanged from a year ago Eurozone The economic activity in the Eurozone continued to expand at a moderate pace in March, as the composite PMI inched up to 53.1, versus 53 in February. The rise in composite PMI was mainly supported by growth in the manufacturing sector. The Eurozone manufacturing PMI edged up to 51.6 in March, versus 51.2 in the previous month, whereas the services PMI inched lower to 53.1 from 53.3 in February. Further, Germany s manufacturing PMI rose to.7 in March, as compared to.5 in the previous month. However, France s manufacturing sector entered the contraction territory as the manufacturing PMI stood at 49.6 in March, versus.2 in the previous month. On the inflation front, consumer prices remained stable from a year ago in March, as compared to a decline of 0.2% y-o-y in the previous month. 3

4 Figure 7 Euro zone PMI trend Index Figure 8 Euro zone inflation trend YoY 2.5% 2.0% 1.5% 1.0% 0.5% -0.5% -1.0% Mfg Service Composite CPI Figure 9 Italy, Spain, and Greece manufacturing PMI trend Figure 10 France and German manufacturing PMI trend Index Index Italy Mfg PMI Spain Mfg PMI Greece Mfg PMI France Mfg PMI Germany Mfg PMI United Kingdom and Japan UK s Q GDP growth was revised upward to 2.1% y-o-y, whereas the manufacturing and services sectors witnessed subdued growth during March Manufacturing PMI in Japan fell below the -mark level in March, whereas CPI rose 0.3% y-o-y in February UK: As per the final estimates released by the Office for National Statistics (ONS), UK s Q GDP growth rate was revised upward to 2.1% y-o-y (the same rate as in Q3 2015), as compared to 1.9% y-o-y estimated previously. Meanwhile, the manufacturing sector in the UK witnessed tepid growth. The manufacturing PMI ticked up to 51.0 in March, as compared to.8 in February, primarily due to a slight improvement in new businesses, although the overall output growth remained constant. The services PMI rose to 53.7 in March, versus 52.7 in February, indicating a slight pick-up in services sector growth. On the inflation front, the CPI edged up 0.5% y-o-y in March, to reach its highest level in 15 months. The surge in CPI was backed by rise in air transport costs due to Easter holidays, together with an increase in prices of clothing and footwear. Japan: The manufacturing sector in Japan entered the contraction territory in March, as the manufacturing PMI stood at a 3-year low reading of 49.1, down from.1 in February. Decline in production due to a moderate drop in new orders, along with sharp reduction in international demand were the main reasons for the fall in manufacturing PMI. Meanwhile, the services PMI declined to the benchmark level of in March, as compared to 51.2 in the previous month, dragged down by decline in employment at service-oriented firms and slow growth in input prices. Inflation rose 0.3% y-o-y in March, as compared to 0% in the previous month, while the CPI inched up 0.1% on a monthly basis, as compared to a decline of 0.4% in February. 4

5 Figure 11 PMI manufacturing trend Figure 12 Inflation trend YoY 4.0% % % % % UK Mfg PMI Japan Mfg PMI UK CPI Japan CPI, Japan s CPI data for March is not yet released Emerging economies China s manufacturing PMI reached a 13 month high, although it remained below the -mark, while annual rate of inflation remained constant in March Manufacturing sector expanded at an accelerated pace in March, while inflation rose 4.8% y-o-y in the same period China: The manufacturing sector in China continued to deteriorate for the 13 th consecutive month in March, although at a slower pace. The Caixin China general manufacturing PMI rose to a 13 month high of 49.7, versus 48.0 in February, mainly supported by an increase in output due to accelerated growth in new orders. The services PMI also rose to 52.2 in March, from 51.2 in the previous month, indicating moderate growth in the services sector. On the inflation front, the CPI rose 2.3% y-o-y, the same rate recorded in the previous month, primarily driven by a jump in food prices. On a monthly basis, inflation declined 0.4%, as compared to a rise of 1.6% in February. India: The Nikkei India manufacturing PMI stood at 52.4 in March, up from February s reading of 51.1, indicating expansion of the manufacturing sector at an accelerated pace. The rise in manufacturing PMI was chiefly backed by solid increase in output and new orders. The services PMI rose to 54.3 in March versus 51.4 in February, primarily on the back of robust growth in new businesses that led to an increase in output. The inflation rate further eased down in March to stand at 4.8% y-o-y, versus 5.3% y-o-y in the previous month, primarily aided by smaller increases in food prices. Meanwhile, India s oil import bill declined 21.9% y-o-y in February 2016 to reach US$ 4.8 billion. Figure 13 Inflation trend YoY 1 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% Figure 14 PMI manufacturing index India China India China 5

6 Figure 15 India s oil import trend Figure 16 China s oil import trend USD bn USD bn India China, Data for March is not yet released The RBI eased its monetary policy, whereas the Fed, ECB, BoE, BoJ and PBoC have kept their monetary policies unchanged Central banks monetary policies Monetary policy US: The Federal Reserve Bank, at its meeting held on March 15-16, 2016, decided to leave interest rates unchanged in the range of 0.25% - 0.5%, primarily due to a slowdown in global growth and volatility in the financial markets. The central bank also stated that inflation is likely to persist at lower levels in the near future, partly because of previous falls in energy prices, thus lowering its inflation forecast to 1.2% (down from 1.6%) in Moreover, policy makers have scaled back their projections for a rate hike to two 25 bps increases, down from its December forecast of four rate hikes this year. Further, the minutes of the March meeting suggested that a rate hike in April was unlikely. The market now expects the US central bank to raise rates at its June meeting. Eurozone: The accounts of March monetary policy meeting published on April 7, 2016 indicated that the European Central Bank (ECB) officials did not preclude further reductions in interest rates. The ECB at its March meeting had reduced its main refinancing rate by 5 bps to, decreased its interest rate on marginal lending facility by 5 bps to 0.25%, while it also lowered the deposit rate to -0.4% from -0.3%. It had also expanded its monthly bond-buying program to 80 billion from billion. The accounts of the meeting stated that many members of the ECB s governing council were inclined toward deeper rate cuts at its March meeting, and prefer such a move going forward, rather than expanding its bond-buying program. The accounts also revealed that the outlook for global economic growth had further worsened, mainly characterized by volatility in global equities. UK: At the monetary policy meeting which ended on April 13, 2016, the Bank of England s (BoE) policy makers voted unanimously to keep interest rates at a record low of 0.5% and to maintain its asset purchase programme steady at 375 billion. The central bank notified that if UK votes to exit from the European Union, the British economy will likely be negatively impacted in the short term. It also noted that uncertainty around the vote had already started to weigh on capital expenditure decisions in the country, which might result in weak growth during Q Market expects that the BoE bank will not hike rates until mid Japan: The minutes of the Bank of Japan s (BoJ) monetary policy meeting published on March 18, 2016 revealed that some policy makers had intensely argued over the central bank s decision to introduce negative interest rates in January. The minutes stated that central bank officials had considered expanding its asset purchase program as an option to introducing negative interest rates. Further, the minutes underlined that the bank may further loosen its monetary policy, if needed. The central bank s governor 6

7 also stated in its speech last month that the rates can be reduced to as low as -0.5%, from current -0.1%. China: The summary of the first-quarter monetary policy committee meeting published on April 1, 2016, showed that the People s Bank of China would consider different monetary policy options to maintain adequate liquidity in the economy. The summary noted that although China s economy was functioning smoothly, the risks to global financial markets had increased and hence the intricacies in current situation should not be underestimated. Further, the summary also emphasized that the Chinese central bank would take more steps to improve the share of direct financing, lower social financing costs and expand financial restructuring. Moreover, the market expects the central bank to further ease its monetary policy, as producer prices continued to decline for the 49 th consecutive month in March. India: At its latest monetary policy meeting held on April 5, 2016, the Reserve Bank of India (RBI) reduced its repo rate by 25 bps to 6.5%, but maintained its cash reserve ratio (CRR) at 4%. However, the minimum daily maintenance of the CRR was reduced to 90% from 95%. The Statutory Liquidity Ratio (SLR) was also cut by 25 bps to 21.25%. Further, the RBI maintained its forecast of 7.6% growth by 2017, backed by assumptions of a normal monsoon and increase in consumption demand due to implementation of 7 th pay commission. Moreover, the RBI governor stated that the central bank would adopt a loose monetary policy and take further steps depending upon the macroeconomic and financial situations. US 10-year treasury yields rose in March, backed by strong economic data released at the start of the month and hawkish comments by Fed officials Sovereign bonds and interbank rates The yield on US 10-year Treasury bonds rose by 3.4 bps m-o-m to 1.77% at the end of March Yields were primarily boosted by upbeat economic data released at the start of the month, together with hawkish comments by various Fed officials. However, the rise in yields was limited by Fed chairwoman s speech at the end of the month in which she indicated that the central bank would be cautious in its approach to raising rates. Further, the yield on the UK 10 years gilt rose by 7.8 bps m-o-m to 1.42%, while the yield on the 10-year German bund moved up by 4.6 bps m-o-m to 0.15%. Figure year government yields Figure 18 One year government yields 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% -0.5% 1.0% 0.8% 0.6% 0.4% 0.2% -0.2% -0.4% -0.6% -0.8% US Germany UK Japan US Germany UK Japan Crude oil prices rose in March, backed by continued talks over freezing of output, along with fall in US crude production and a weak US dollar Commodities Crude oil & natural gas Crude oil prices climbed across all geographies during March 2016, with Brent rising by 8.3% m-o-m to end at US$ 40.33/bbl as of March 31, The jump in oil prices was mainly supported by continued discussions among major oil producers to stabilize oil production, coupled with a decline in US crude production and a weak US dollar. Meanwhile, natural gas (Henry hub) prices leapt 14.5% m-o-m during March 2016 to end at US$1.96/mmbtu, mainly driven by less-than-expected rise in natural gas 7

8 inventories, together with cold weather forecasts in several areas of the US in later part of the month. Figure 19 Crude oil prices Figure 20 Gas (Henry hub) prices trend US$/bbl US$/mmbtu WTI Brent Arab Light Henry hub Gold & Silver Gold prices edged down in March, whereas silver prices registered a monthly gain Gold prices registered a monthly decline of 0.5% in March, to end at US$1, per ounce. The fall in gold prices can be primarily attributed to a rise in global equity markets and strong oil prices. However, silver prices rose 3.6% m-o-m, to end at US$ per ounce, versus a rise of 4.5% m-o-m in February. Figure 21 Gold prices trend US$/Ounce 1,0 1,4 1,400 1,3 1,300 1,2 1,200 1,1 1,100 1,0 1,000 Figure 22 Silver prices trend US$/Ounce Equities MSCI global equity index advanced in March, supported by rising commodity prices, along with Fed s dovish stance on rate hikes The MSCI global equity index gained 7.2% m-o-m in March, backed by gains in commodity prices, together with Fed s decision to keep interest rates unchanged at its March meeting. The markets were also boosted by US soft consumer spending data and Fed chairwoman s speech at the end of the month, which led to expectations of a slowdown in rate hikes by the US Fed this year. The rise in index was led by India, the US, Germany, Japan and the UK which advanced 10.2%, 6.6%, 5.0%, 4.6% and 1.3% respectively. Meanwhile, in the Middle East, Dubai rose 3.6%, followed by Saudi Arabia, Muscat, Abu Dhabi and Kuwait, which added 2.1%, 1.3%, 0.9% and 0.4% respectively. 8

9 Figure 23 Benchmark Index return mom 14.0% 12.0% 1 8.0% 6.0% 4.0% 2.0% Figure 24 Fwd P/E chart 20.0x 18.0x 16.0x 14.0x 12.0x 10.0x 8.0x 6.0x 4.0x 2.0x 0.0x, Return calculated for the month of March Figure 25 MSCI global Index Figure 26 MSCI global P/E movement chart Billion Index x 17.0x 16.0x 15.0x 14.0x 13.0x 12.0x 11.0x 10.0x 9.0x 8.0x 7.0x 6.0x Volume LHS Index RHS Figure 27 MSCI global sectoral YTD performance Figure 28 MSCI regional YTD performance Financials Industrials Energy Telecom Services Automobile US Europe Japan Emerging, Rebased 2015=100, Rebased 2015=100 9

10 Forex US dollar fell against all major currencies in March Figure 29 Euro/USD The US dollar declined against all major currencies in March, dragged down by expectations of a delay in raising interest rates by the US Fed. The USD dropped 4.5%, 3.7%, 3.1% and 0.1% against the EUR, CHF, GBP and JPY respectively. Figure 30 USD/CHF Euro/USD USD/CHF Figure 31 USD/JPY Figure 32 GBP/USD USD/JPY GBP/USD 10

11 Table 1 Real GDP growth Economies Q Q Q Q Q1 2016E Q2 2016E Q3 2016E US 0.6% 3.9% 2.0% 1.4% 1.2% 2.3% 2.4% Europe 1.3% 1.6% 1.6% 1.6% 1.4% 1.4% 1.5% Japan 4.6% -1.4% 1.4% -1.1% 0.5% 1.2% 1.4% UK 2.6% 2.4% 2.2% 2.1% 2.0% 1.8% 2.0% India 6.7% 7.6% 7.7% 7.3% 7.5% 7.5% 7.6% China 7.0% 7.0% 6.9% 6.8% 6.7% 6.6% 6.5% Source: Al Rajhi Capital, forecasts are Bloomberg consensus Table 2 Inflation (CPI) Economies Q Q Q Q Q1 2016E Q2 2016E Q3 2016E US -0.1% 0.1% 0.5% 1.1% 1.1% 1.3% Europe -0.3% 0.2% 0.1% 0.1% -0.1% 0.4% Japan 2.3% 0.5% 0.1% 0.3% -0.1% 0.2% UK 0.1% 0.1% 0.4% 0.5% 0.7% India 6.6% 5.9% 4.6% 6.4% 5.3% 5.4% 5.3% China 1.2% 1.4% 1.7% 1.5% 2.0% 1.7% 1.6% Source: Al Rajhi Capital, forecasts are Bloomberg consensus Table 3 Economic Calendar Country Event Name Period Start Date US Building Permits (MoM) March 19-Apr-2016 UK Retail Sales (MoM) March 21-Apr-2016 Eurozone ECB Interest Rate Decision 21-Apr-2016 Eurozone Markit PMI Composite (Preliminary) April 22-Apr-2016 US Durable Goods Orders March 25-Apr-2016 UK Gross Domestic Product (YoY) (Preliminary) Q1 27-Apr-2016 US Fed Interest Rate Decision 27-Apr-2016 Japan Unemployment Rate March 27-Apr-2016 Japan Industrial Production (YoY) (Preliminary) March 27-Apr-2016 Japan BoJ Interest Rate Decision 28-Apr-2016 Eurozone Consumer Price Index (YoY) (Preliminary) April 29-Apr-2016 US Personal Spending March 29-Apr-2016 China NBS Manufacturing PMI April 1-May-2016 US ISM manufacturing PMI April 2-May-2016 Eurozone Producer Price Index (YoY) March 3-May-2016 Eurozone Markit PMI Composite April 4-May-2016 Eurozone Non-monetary policy's ECB meeting 4-May-2016 US ISM non-manufacturing PMI April 4-May-2016 US Unemployment Rate April 6-May-2016 US Nonfarm Payrolls April 6-May-2016 China Trade Balance USD April 9-May-2016 China Consumer Price Index (YoY) April 10-May-2016 UK NIESR GDP Estimate (3M) April 11-May-2016 Eurozone Industrial Production (YoY) March 12-May-2016 UK BoE Interest Rate Decision 12-May-2016 Eurozone Gross Domestic Product (YoY) (Preliminary) Q1 13-May-2016 US Retail Sales (MoM) April 13-May-2016 Japan Gross Domestic Product (YoY) (Preliminary) Q1 16-May-2016 UK Consumer Price Index (YoY) April 17-May-2016 US Consumer Price Index (YoY) April 17-May-2016 Source: Al Rajhi Capital 11

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