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Aditya Pugalia - Director, Financial Markets Research
Published Date: 16 June 2019
Notwithstanding growing concerns over global economic growth and rising geopolitical tensions, investors appear to be taking comfort in shift of global central banks towards easier monetary policy. The weakness in commodity prices was also shrugged off last week. Overall, the MSCI All Country index added +0.3% 5d with most sub-indices closing in positive territory. The MSCI G7 index, the MSCI EM index and the MSCI FM index added +0.3% 5d, +0.8% 5d and +0.2% 5d respectively. Volatility continues to remain surprisingly subdued. The VIX index and the V2X index dropped -6.3% 5d and -3.7% 5d respectively while CBOW EM ETF Volatility showed a minor gain of +2.3% 5d.
The focus this week will firmly remain on the US Federal Reserve meeting. With the markets actually pricing in as much as three rate cuts in 2019, the comments from the Fed Chair Jerome Powell will be minutely deconstructed. Elsewhere, developments in ongoing geopolitical tensions will also be watched for any potential escalation.
The recent rally in Saudi equities has brought back the focus on the commonly focused correlation between the Tadawul and oil prices. The broader index is up c.6% since MSCI added its stocks in the EM index at the end of May 2019 while Brent prices have dropped 13% in the same period. This in turn has dragged the 120-day correlation between stock and oil prices to its lowest this year at 0.15.
Source: Bloomberg, Emirates NBD Research
Regional markets rallied for a third consecutive week amid continued positive aftereffects of index inclusions. Notwithstanding the rise in geopolitical tensions and weakness in oil prices, the S&P Pan Arab Composite index gained +1.8% 5d. For the record, WTI and Brent futures dropped -2.0% 5d and -2.7% 5d respectively.
The Tadawul was the outperformer with gains of +5.0% 5d. Unsurprisingly, gains were led by MSCI-related stocks as reflected in +6.0% 5d rally in the MSCI Saudi index. It must be highlighted here that the broader Saudi market will continue to see inflows over the next few months as different phases of inclusion in different emerging market indices are implemented. For example, the Phase 3 of FTSE inclusion is expected to be completed later this week. The index continues to trade at a significant premium to the wider emerging market index. The Tadawul is trading at 16.8x 12m forward earnings compared to the MSCI EM index which is trading at 12.3x 12m forward earnings.
UAE bourses closed mixed with the DFM index adding +0.5% 5d and the ADX index losing -0.8% 5d. Dubai Islamic Bank ended the week flat even as the bank confirmed that its board has recommended acquisition of Noor Bank. The deal, if completed, will create a bank with about USD 76bn in assets.
Elsewhere, the Qatar Exchange rallied +1.9% 5d to move into positive territory for the year. The start of implementation of stock split in Qatari stocks provided a boost to investor sentiment. Under the said proposal, the nominal value of all listed companies will become QAR 1. The same is expected to finish on 7 July 2019. The idea behind the proposal is to attract retail investors and increase liquidity in the market.
Developed market equities closed marginally higher as optimism over easy monetary policy was offset by worries over the impact of US-China trade war. There are growing evidence that the lengthening negotiation period is starting to weigh on revenues. For example, Broadcom Inc trimmed its sales forecast for the year.
Overall, the S&P 500 index, the Euro Stoxx 600 index and the Nikkei index ended the week +0.5% 5d, +0.4% 5d and +1.1% 5d respectively.
Emerging market equities outperformed the broader market. The MSCI EM index added +0.8% 5d compared to gains of +0.2% 5d in the MSCI World index. It appears that dovishness in developed market monetary policy is providing comfort to investors to increase their emerging market exposure. The weakness in commodity prices is also helping some emerging markets.
Ironically, Chinese equities were among the best performing emerging equities even as the country remains central to the ongoing concerns over growth. Economic data released over the weekend added further credence to the view as industrial output growth slowed to the weakest pace since 2002. The Shanghai Composite index added +1.9% 5d.
Elsewhere, Russia joined countries in shifting towards easy monetary policy. The Russian central bank cut interest rates for the first time in more than a year. Further the bank added that there could be two more rate cuts in 2019. The Indonesian Finance Minister commented that it expects the country’s central bank to ease monetary policy.
Global equities closed higher
Global equities closed higher
Global equities closed lower
UK July GDP firmer than expected