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Aditya Pugalia - Director, Financial Markets Research
Published Date: 13 January 2019
Global equities closed higher as dovish commentary from Fed official and signs of some progress in first round of trade talks between the US and China outweighed the continued partial shutdown of the US government and uncertainty over Brexit. The downgrade of global growth forecasts by the World Bank appeared to have been interpreted by investors as the need for central banks to pause on further tightening of monetary policy. The MSCI All Countries index added +2.9% 5d with all major sub-indices closing in positive territory. The MSCI G7 index, the MSCI EM index and the MSCI FM index added +2.8% 5d, +3.8% 5d and +2.1% 5d respectively. Volatility came off the highs with VIX index, the V2X index and the CBOE EM ETF Volatility index dropping -14.9% 5d, -15.0% 5d and -15.2% 5d respectively.
The early part of this week will see the UK Parliament vote on Brexit deal. While the deal is widely expected to be rejected, the continued uncertainty over the chain of events following the vote is expected to weigh on financial markets. Additionally, investors will be keeping an eye on earnings and US government shutdown talks. A prolonged government shutdown, which appears likely at the moment, will start to weigh progressively more on investor sentiment.
The start of 2019 was marked by a cut in earnings guidance by a couple of large market heavyweights. This has put the focus on earnings which has been the strongest pillar of support for equity prices over the last couple of years. It is becoming evident that the continued delay in tangible resolution in trade talks between the US and China and visible slowdown in economic activity is likely to weigh on corporate earnings. As per Citigroup’s global earnings revision index, analysts at the start of 2019 lowered the profit estimates by most since 2009.
MENA equities continued their positive start to the year amid rebound in oil prices and fresh inflows. The MSCI Arabian Markets index added +1.6% 5d while Brent oil gained +6.0% 5d.
One common theme across regional markets in the current rally has been the outperformance of banking sector stocks. The S&P GCC Composite Banks index rallied +4.9% w-o-w. The strength in banking stocks can be attributed to positioning ahead of expected strong earnings and dividend season, clarity on Zakat payments for Saudi Arabian banks and continued appetite for mergers among regional banks. Al Rajhi Bank rallied +10.4% 5d after the bank announced 7 bonus shares for every 13 held and also recommended a cash dividend of SAR 2.25 per share for H2 2018.
The Tadawul led the rally with gains of +4.9% 5d. This was the largest weekly gain since April 2018 and was broad-based with most sectors closing in positive territory. The Tadawul Banking Sector index and the Tadawul Materials index, which together account for nearly 70% weight in the main index, rallied +7.1% 5d and +4.7% 5d respectively.
Developed market equities closed higher across the board even as key issues of the US government shutdown and Brexit made little progress. With key economic data absent due to the partial government shutdown, the rally was primarily driven by consistently dovish comments from various Federal Reserve speakers including the Chairman Jerome Powell. The word ‘patient’ was repeated by every speaker as they collectively tried to calm financial markets. Additionally, weaker economic data, mainly PMI indices, across key economies led further credence to the consensus view that most central banks will stay put. The S&P 500 index, the Euro Stoxx 600 index and the Nikkei index added +2.5% 5d, +1.7% 5d and +4.1% 5d respectively.
The earnings season in the US has got off to a rather muted start. With 4% of companies in the S&P 500 index having reported earnings, 90% of companies have reported a positive EPS surprise and 65% have reported a positive revenue surprise. However, according to FactSet, the blended earnings growth is 10.6% compared to estimates of 12.3% at the end of 2018.
Emerging market equities outperformed broader equities. The MSCI EM index added +3.8% 5d compared to a gain of +2.8% 5d in the MSCI World index. The renewed strength in commodities, dovish Fed talk and weaker USD all played its part in the strength of emerging market assets.
Chinese equities rallied amid hopes that the reported progress in trade talks with the US will lead to some tangible outcome. The stocks also received a boost from government official comments about plans to boost consumer purchasing power, central bank’s decision to lower reserve requirement ratios and government’s proposal to increase budget deficit in a bid to support economy. The Shanghai Composite index added +1.6% 5d.
Global equities closed lower
GCC Equity Flow Monitor - June 2019
Global equities closed marginally higher
Daily Outlook: Mixed messages from US data