The UAE markets ended January positively, with both Dubai and Abu Dhabi rising to different extents.
But the standout performer in the GCC region has, however, been the Kuwait Stock Exchange Index, the world’s best performer this year after concluding the first month of the year nearly 19 per cent higher.
The remarkable rally on the Kuwaiti bourse stretched over a period of 18 consecutive days, with the index also managing to climb to its highest level since November 2014. This was also roughly the same time when the price of oil began its tumble.
The reason for the improved sentiment is not correlated to the price of oil, but is instead seen as being linked to Kuwait moving a step closer to a dollar bond sale.
This is a story closer to home, but the major international development is the reaction to the unprecedented decision by the administration of US president Donald Trump to ban nationals from seven nations from entering the United States.
This has resulted in protests and anger across the globe while also providing an extra dose of market volatility, with major stock markets across Asia, Europe and the US all suffering losses at the start of this week.
I believe that investors got carried away after pricing in heavy premiums for what has become known as the “Trump rally” based on fiscal promises and infrastructure spending, and that they are now beginning to consider the political risk element from Mr Trump’s right-wing policies.
Basically, the Trump rally was encouraged by policies based on the positive impact that deregulation, infrastructure spending and job growth would have on the US economy, but the news headlines so far since Mr Trump’s inauguration have been driven by the “America First and always” protectionist rhetoric.
Instead of investors receiving clarity on how Mr Trump intends to fulfil his campaign promises around fiscal stimulus, we have witnessed restrictions on immigration and his renewed pledge to build the wall on the US-Mexico border, leading to concerns that the US is at risk of making steps towards moving away from globalisation.
With the US regarded as the most powerful country and largest economy in the world, we can expect these political developments to continue attracting major headlines throughout the global markets.
The question to ask if you are from the UAE is whether this could impact the local market, which to be honest, is likely to carry a higher risk for the dirham than equities as it currently stands.
The reason for this is because investors have yet to price in the protectionist nature of Mr Trump’s campaign promises into the dollar, and because very little has been analysed about how the US president needs a weaker dollar for some of his policies to work.
Mr Trump can promise to cut taxes, deregulate or offer additional incentives to move business back to the US, but unless domestic operating costs are lower than what you pay overseas, businesses are still likely to prefer making goods outside of the US.
Mr Trump will have a very difficult assignment on his hands encouraging corporations to stop making goods or products in developing nations, mainly because of the significantly lower overheads that occur from producing goods in these markets. Therefore we should begin to be prepared for comments on the strength of the dollar from president Trump and his team.
I do expect Mr Trump’s administration to make increased comments about the strength of the dollar, because it is counterproductive to what he wants to achieve as the president. And he already did this week when he accused China and Japan of manipulating their currencies while the US sat by “like a bunch of dummies”.
It should only be a matter of time before investors begin to clock on to the fact that the dollar is set to be targeted in an attempt to weaken its momentum and while this will be beneficial for currencies like the euro and the Japanese yen, it will not be such good news to currencies pegged to the dollar such as the dirham.
Hussein Sayed is the chief market strategist at FXTM
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