Aditya Pugalia - Director, Financial Markets Research
Published Date: 20 May 2018
Global equities closed lower as investors’ focus shifted to rise in bond yields and mixed signals from trade talks between the US and China. The continued rise in oil prices did lend some support to equities. Overall, the MSCI World index dropped -0.5% 5d on the back of -2.3% 5d drop in the MSCI EM index and -0.5% 5d fall in the MSCI G7 index. The S&P Pan Arab Composite index closed higher with gains of +0.7% 5d. Volatility gained across the board with the VIX index (US), the V2X index (Europe) and the CBOE EM ETF volatility index adding +6.1% 5d, +12.3% 5d and +9.1% 5d respectively.
With yields remaining in focus, investors’ will be sifting for clues from the minutes of the last Fed meeting which will be released later this week. They will also be paying attention to comments from various Fed speakers including Fed Chair Jerome Powell. Additionally focus will remain on talks between the US and China on the trade front.
Within GCC, the focus of investors’ remain on the Tadawul. The technical study of the Tadawul chart shows that the price remains above the supporting 50 day moving average (MA) 7977.83 and the 76.4% one year Fibonacci retracement of 7969.35 and that further upside seems the path of least resistance. In addition, the current 14 day Relative Strength Index (49.46) shows conditions are neutral with momentum showing a slightly bullish bias which further enhances the risk of this outcome.
Source: Emirates NBD Research, Bloomberg
Most MENA equity indices closed higher on the back of flows related to the MSCI index review announcement. The Tadawul (+1.3% 5d) and the Qatar Exchange (+1.6%) led gains in the region. The positive impact of oil prices are yet to filter into regional markets even as it rose above USD 80/bbl. Eventually, Brent prices ended the week with gains of +1.8% 5d.
As part of the MSCI review, Emaar Development was added to the index and weights of several Qatari stocks were increased. These included Qatar National Bank, Qatar Electricity & Water Co, Industries Qatar and Qatar Islamic Bank. DXB Entertainments and Qatar Gas Transport Co were removed from the index. All these changes will be effective May 31, 2018. The impact of the review was felt on share prices of these companies. Emaar Development rallied +2.8% 5d, Qatar National Bank gained +8.1% 5d, Qatar Electricity & Water Co added +0.6%. On the other hand, DXB Entertainment and Qatar Gas Transport Co lost -2.4% 5d and -6.9% 5d respectively.
The Tadawul added +1.3% as the focus continues to remain on a potential upgrade to the EM status. Along with the MSCI, the S&P Dow Jones Indices said last week that it is ‘considering changing the country classification of Saudi Arabia to reflect the progress made with regard to financial market reform’. Currently the market is ranked as a stand-alone country. According to estimates from the index compiler, Saudi Arabian equities would have a 2.57% weightage in its emerging benchmark index. While the fund tracking S&P DJI indices are estimated to be smaller compared to the FTSE Russell and the MSCI, it would nevertheless add to the fund flowing into Saudi Arabia.
Developed market equities closed mixed as a combination of higher yields, fresh speculation of trade talks with China and possibility of a coalition government in Italy dominated flows. The S&P 500 index lost -0.5% 5d while the Euro Stoxx 600 index and the Nikkei index added +0.6% 5d and +0.8% 5d respectively. The gains in European and Japanese equities received a boost from further declines in the EUR/USD (-1.4% 5d) and USD/JPY (-1.3% 5d).
While the broader European stock index closed in positive territory, the FTSE MIB index (Italy) lost -2.9% 5d. The losses reflect the concern of investors following an agreement between the Five Star Movement and the League to form a coalition government. While they are yet to nominate a prime minister, the proposed program includes a review of EU fiscal rules, the rolling back of pension reforms as well as tax thresholds for companies and people.
Emerging market equities underperformed wider equity markets with the MSCI EM index losing -2.3% 5d compared to a loss of -0.5% in the MSCI World index. The continued strength in the USD and sustained rise in treasury yields seem to be weighing on investor sentiment. The JP Morgan EM Live Spot index lost -1.7% 5d.
The MSCI confirmed that it will be adding A-shares of 234 Chinese companies to its MSCI EM index. According to the MSCI, the initial inclusion would lead to c. USD 17bn in passive funds which could rise to USD 35bn in coming years. However, it must be noted that initially only 5% of the stock’s market capitalization will be added and hence they are expected to have a weighting of 0.39% in the MSCI EM index to begin with.
GCC Equity Flow Monitor - June 2018
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