Aditya Pugalia - Director, Financial Markets Research
Published Date: 11 February 2018
Global equities closed lower for a second consecutive week amid increasing volatility as concerns over inflation gained further ground. However, what was more striking was the complacency of investors despite the velocity of moves across markets and their unwillingness to see the recent moves beyond the theory of ‘much needed correction’. The VIX index touched a high of 50.0 before retracing back to still-high 29.0 level. Overall, the MSCI World index dropped -5.6% 5d with all its major sub-indices deep into negative territory.
The after-effect of moves last week is likely to remain an overhang on equity markets this week. The inflation data, scheduled for this week, will be watched more closely than usual and could well drive moves in equity markets. The volatility is likely to remain at elevated levels as the contagion spreads to different asset classes. Regional market are likely to take cue from broad market moves.
The past week was all about volatility. While the VIX index move to 50.0 did grab headlines, there are signs that the spike in volatility was not restricted to equities alone. Volatility in US treasuries shot up with the BAML MOVE index rising to its highest level since April 2017. Similarly, the implied volatility in EURUSD on a benchmark 25-delta put surged to almost 10% from 7.7% a week ago.
MENA equities closed lower across the board amid multiple triggers i.e., weak corporate earnings, volatility in global markets and sharp sell-off in oil prices. The MSCI Arabian Markets index dropped -1.7% 5d and oil (Brent) declined -8.4% 5d.
The Tadawul lost -3.3% 5d, its worst weekly performance since October 2017. The consumer services sector stocks were among the worst performers with the Tadawul Consumer Services index dropping -5.4% 5d. This was on the back of weak corporate earnings from the sector. Al Tayyar Travel Group reported 2017 full year net profit at SAR 497mn, missing consensus estimates of SAR 675mn by 26.3%. The government’s decision to lift ban on cement exports did little to help related stocks. Saudi Cement Co dropped -1.6% 5d while Yamama Cement lost -3.3% 5d.
UAE bourses closed lower with the DFM index and the ADX index losing -2.5% 5d and -0.3% 5d respectively. DP World ended the week with losses of -2.1% even as the company reported strong operating performance for 2017. The company said it handled 70.1mn twenty-foot equivalent units across its global portfolio in 2017. The gross container volumes grew 10.1% y/y on a reported basis and 9.7% y/y on a like-for-like basis. The company added that it is well placed to meet 2017 estimates.
It was the most volatile week of trading for developed market equities in recent months. While there was no apparent trigger, most investors pointed towards rising bond yields, growing concern over inflation and drop in commodity prices. The inflation theory got a further boost following the Bank of England meeting. The BoE approach turned hawkish as the central bank warned of larger rises in interest rates. Having said that, the commentary around velocity of moves did point towards continued investor complacency and their willingness to invest back in markets at the earliest opportunity. This tendency, if continued, could lead to more exaggerated moves and heightened volatility.
The S&P 500 index, the Euro Stoxx 600 index and the Nikkei index lost -5.2% 5d, -5.0% 5d and -8.1% 5d respectively. Following the moves last week, all developed market equities are now in negative territory for the year.
One factor which has allowed investors to keep their faith in markets despite the sell-off has been the strength in corporate earnings. With nearly 68% of companies in the S&P 500 index reporting earnings, 74% of those have reported positive earnings surprise and 79% have reported positive sales surprise. According to FactSet, the aggregate earnings growth for Q4 2017 is 14.0% relative to an estimate of 11.0% at the end of 2017. The blended sales growth stands at 8.0%.
Emerging market equities underperformed broader equity markets. The MSCI EM index dropped -7.2% 5d compared to a decline of -5.6% 5d in the MSCI World index. This was the sharpest weekly decline in the broader EM index since September 2011.
The past week was dominated by central bank meetings. While the Brazilian Central Bank cut rates by 25 bps to 6.75%, India’s Reserve Bank of India kept rates on hold. It does appear that we are nearing the end of easing cycle even in emerging markets as the Brazilian Central Bank, following the rate cut, said that the best choice from hereon would be to end the rate reduction cycle.
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