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New on the Frontier (Aug 19-23): Kuwaiti CPI on Tap amid Regional Volatility and Lower Oil Prices

By:

Senior Market Analyst at Interactive Brokers

Investors focusing on international markets will receive an update on Kuwait’s consumer prices in the week ahead, as the oil-rich nation contends with heightened geopolitical volatility.

Kuwait’s economic power is mainly concentrated in the oil sector, which accounts for roughly 50% of its gross national product (GDP), leaving its financial well-being vulnerable to changes in the cost of the commodity, as well as its production.

Increased production in the U.S., for example, has helped to lower the cost of crude, with the current futures contract having fallen close to 26.8% from its latest 52-week peak set in early October 2018. Crude oil had also slipped around 2% on the day Thursday to less than US$54.60 per barrel.

The Energy Information Administration’s weekly count of U.S. commercial crude oil inventories showed a rise in the week ending August 9 of 1.6 million barrels. At 440.5 million barrels, U.S. crude oil inventories are about 3% above the five-year average for this time of year.

Market participants have also attributed lower prices of oil to softer demand for energy, as global growth slows.

Analysts at S&P Global also warned that “a significant escalation of regional tensions could have a detrimental impact on Kuwait’s economy if trade routes are disrupted.” Over the past few months, multiple attacks on oil tankers have taken place near the Strait of Hormuz, for example, where all of Kuwait’s oil exports travel.

S&P added that geopolitical tensions in the region are “likely to persist and perhaps increase due to ongoing tensions between the GCC countries and Iran and the re-imposition of sanctions on Iran by the U.S.” Meanwhile, relations have also soured within the GCC, since Saudi Arabia, the United Arab Emirates, and Bahrain, along with some other countries in the region, imposed a boycott on Qatar in June 2017.

Against this backdrop, investors will receive a fresh gauge of inflation from Kuwait’s consumer price index (CPI) in the week ahead, as the country generally aims to strengthen the environment that supports non-inflationary economic growth in its non-oil sectors.

With this aim in hand, the Central Bank of Kuwait (CBK) has maintained its current discount rate of 3%, while navigating shifts in U.S. monetary policy and currency fluctuations, in large part given its reliance on U.S. dollar-valued oil.

Thursday, Aug 22 – CPI (Jul)

Kuwait’s CPI in June had inched up by 0.53% over the prior month to 114.1, mainly on the back of higher costs of transport (+3.64), as well as recreation and culture (+2.82). On an annual basis, consumer prices increased by 1.06% compared with June 2018 – primarily due to higher costs of communications (+5.41), amid rising prices of telephone and fax services.

The uptick in inflation, as well as recent global headwinds and market volatility, appear to have had little impact on some of Kuwait’s stocks, as evidenced by the KMEFIC FTSE Kuwait Equity UCITS ETF (KUW8), whose main holdings include Kuwait Finance House KSCP (KFH.KW), Ahli United Bank BSC (AUBK.KW), and Mobile Telecommunications Company (ZAIN.KW). The ETF’s three-month gross returns (~7.80%) have also been outperforming the MSCI Frontier Markets Index (~7.30%), with its price recently above the iShares Frontier 100 ETF (NYSEARCA: FM).

Investors will likely be watching developments in the oil industry, including U.S. production levels and regional geopolitical tensions for any impacts on oil prices and Kuwait’s economy.

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.

Disclosure: Interactive Brokers

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