Global equities closed higher last week

Notwithstanding weak economic data and poor corporate earnings, global equities closed higher as investors started training their eyes beyond the immediate fallout from the coronavirus. The move also reaffirmed the deepening dependence of equity markets on central banks as they started pricing in the possibility of the Federal Reserve moving rates into negative territory.

Overall, the MSCI All Country World index +2.4% 5d on the back of strength in developed and frontier markets. The MSCI G7 index and the MSCI FM index added +3.2% 5d and +1.1% 5d respectively. Volatility too eased off across markets. The VIX index, the V2X index and the CBOE EM ETF Volatility index dropped -24.8% 5d, -12.6% 5d and -17.5% respectively.

The week ahead is relatively light on economic data. Hence the focus of investors will remain on corporate earnings and efforts of governments in easing lockdown measures. The progress on talks between the UK and the European Union will also be monitored in light of dire economic growth projections by the Bank of England.

Chart of the week

Much of the focus towards the latter half of the trading week remained on the lack of market reaction to what was the worst US jobs report on record. While a part of the reason could be the predictability of the data in light of warnings from the initial jobless claims, the main reason appears to be the fact that nearly 79% of those unemployed last month were furloughed. This is much higher than the numbers in the previous recessions and hence also raises the possibility that a large number of furloughed workers could be recalled as soon as the economy is running in the truest sense.

Furloughed workers made up for more than three-fourth of total unemployed people in the US

Source: Bloomberg

MENA Markets

Regional markets were unable to sustain the positive momentum from last week even as oil prices continued to rally. The S&P Pan Arab Composite index dropped -4.5% w-o-w. It is worth noting that much of the losses came in the early part of the week when global sentiment was weak too. 

UAE bourses closed lower with the DFM index and the ADX index losing -5.1% 5d and -4.0% 5d respectively. Losses were led by market heavyweights as investors locked in gains from the previous week. Abu Dhabi Commercial Bank dropped -9.0% 5d. The bank reported a Q1 2020 net profit of AED 207mn (-82% y/y). The decline was mainly on account of provisions of AED 1.88bn, of which AED 1.07bn was related to NMC Health, Finablr and other related companies.

The Tadawul dropped -6.8% 5d as the share price of petrochemical companies could not keep pace with the rise in oil prices. Saudi Aramco dropped -2.1% 5d while Sabic declined -5.5% 5d. Sabic reported a loss in Q1 2020 and suspended all discretionary capital expenditure leading to speculation of a possible cut in dividend payout.

Developed Markets

Developed market equities closed higher as investors retained their faith in the ‘central bank put’ and paid more attention to signs of more economies opening up. The positive noise around the implementation of the trade deal and a sustained rebound in oil prices also lent support to risk assets. Irrespective of market confidence, the Bank of England became the latest central bank to strike a somber tone about economic prospects. They expect the UK GDP to drop by as much as 14% in 2020 before rebounding by 15% in 2021. They also expect it to take a year before businesses return to normal.

Overall, the S&P 500 index, the Nikkei index and the Euro Stoxx 600 index added +3.5% 5d, +2.0% 5d and +1.1% 5d respectively. The Nasdaq index turned positive for the year with gains of +1.7% ytd.

The earnings season in the US remains rather dismal. With nearly 86% of companies in the S&P 500 index having reported earnings, 66% of companies are reporting profits and 58% of companies are reporting sales above estimates. According to FactSet, the blended earnings growth at the end of last week came in at -13.6%. If this rate of decline holds, then this will be the largest y/y decline in earnings since Q3 2009. The S&P 500 index is currently trading at 20.4x 12m forward earnings, higher than the 5y and 10y averages.

Emerging Markets

Emerging market equities underperformed the broader market. The MSCI EM index lost-0.6% 5d relative to a gain of +2.9% 5d in the MSCI World index. The weakness in the USD and strength in oil prices did help the broader emerging markets but could not overshadow deep declines in certain pockets.

Turkey’s Istanbul 100 index dropped -3.2% 5d as volatility in TRY weighed on broader investor sentiment. India’s Nifty index dropped -6.2% 5d as the composite PMI dropped to single digits following a nationwide lockdown for the full month of April.  The historical comparison with GDP data suggests that India’s economy contracted at an annual rate of 15% in April 2020.

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