Aditya Pugalia - Director, Financial Markets Research
Published Date: 08 April 2018
Global equities closed lower as investors’ saw measures and counter-measures declared by the US and China on the trade front. The worry for investors appears to lack of strategy in these measures and little clarity on when and if a negotiated settlement can be reached between the two countries. Mixed economic data from the US and the Eurozone added to the uncertainty. The MSCI World index dropped -0.7% 5d amid weakness in the MSCI G7 index (-0.8% 5d) and the MSCI EM index (-0.8% 5d). Volatility rose in the US with the VIX index adding +7.6% 5d to remain above the 20.0 level but dropped in Europe and remained flat in emerging markets.
With the ‘trade tantrum’ starting to have an impact, the Q1 2018 corporate earnings season starting this week becomes all the more important. Investors’ would be keen to confirm that the strongest pillar of support i.e., earnings continues to provide buffer against political uncertainties. Regionally, flows are likely to be driven by expectations of further foreign investor inflows into the region.
With the current focus on the US-China trade disputes, it is not surprising to see stocks with exposure to China taking a hit. The MSCI World with China exposure index has declined to its lowest level since October 2017. The index reflects the performance of companies with significant exposure to China regardless of domicile by deriving a company’s economic exposure using the geographic distribution of its revenues.
It was a mixed week of trading for MENA equities as flows continued to be driven by measures taken by different bourses to attract foreign investor inflows. The Qatar Exchange index added +2.6% 5d and the Tadawul gained +1.1% 5d while the DFM index lost -0.8% 5d.
Gains on the Qatar Exchange were driven by announcement from Qatar Petroleum that it will lift non-Qatari ownership limit in energy sector companies and its subsidiaries listed on the exchange to 49%. This drove sharp gains in Qatar Fuel (+8.1% 5d), Gulf International Services (+10.0% 5d) and Mesaieed Petrochemical Holding Co (+4.8% 5d). It must be noted here that the changes need to be implemented fairly quickly so as to be eligible for weight gains in the MSCI May review.
Elsewhere, this was the first week of trading with changes in indices in Kuwait. The Boursa Kuwait Premier Market Price Return index dropped -3.1% as investors take time to get used to the changes. For the record, the market is now divided into three segments i.e., Premier, Main and Auction. The Premier index is composed of the largest and most liquid companies. The segmentation is designed to improve liquidity and transparency.
It was a volatile week of trading for developed market equities as risk of a full-blown trade war between the US and China escalated. The past week saw both the US and China announce tariffs on each other’s products without a deadline to implement them. The vagueness in announcements at the start of the week led investors to believe that these are mere posturing and that a negotiated solution is inevitable. However, US President Donald Trump doubled down with announcement of fresh tariffs towards the end of the week which exemplified the erratic nature of steps and exposed the lack of an end-game in a battle of high stakes.
A subdued non-farm payrolls data and comments from Fed Chairman Powell suggesting that Fed remains on track to hike three times this year added further uncertainties in investors’ minds. Eventually, the S&P 500 index -1.4% w-o-w while the Nikkei index and the Euro Stoxx 600 index added +0.5% w-o-w and +1.1% w-o-w. Much of the outperformance of non-US developed market equities can be put down to fact that most investors expect Europe to avoid getting caught in the US-China crossfire. The correlation between the Stoxx 600 index and the S&P 500 index is at its lowest since 2006.
Emerging market equities performed in line with broader equity markets with the MSCI EM index losing -0.8% 5d. It was a truncated week of trading for Chinese equities which were the focus of trade measures taken by the US. The Shanghai Composite index dropped -1.2% w-o-w with investors still to react to the latest measures announced by the US towards the end of the week.
India’s Nifty index added +2.2% 5d to outperform emerging market peers. The market received a boost from the Reserve Bank of India which left interest rates unchanged at 6.0%. While the central bank reiterated a neutral stance, it lowered its inflation forecasts considerably. Inflation for H1 FY 2019 is now expected to range between 4.7 %- 5.1% compared to earlier forecast of 5.1% - 5.6%. The forecast for inflation in H2 FY 2019 was also lowered by 20 bps. Having said that, the monetary policy committee continued to highlight upside risks to inflation on account of increased farm price support and possibility of a fiscal slippage by the government. Overall, the stance by the RBI reaffirms our view that the central bank is expected to be on a prolonged pause with no change in policy rate expected in 2018.
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