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Published Date: 15 March 2020
Global equities closed sharply lower as investors fretted over monetary and fiscal measures announced by several governments which were deemed to lack the depth and intensity needed to stave the impact of coronavirus on the global economy. The haphazard manner of announcements and fresh restrictions on economic activities also weighed on investor sentiment. The MSCI World index dropped -12.5% 5d on the back of weakness across its sub-indices. Volatility continued to remain elevated with the VIX index, the V2X index and the CBOW EM ETF Volatility index jumping +37.9% 5d, +72.8% 5d and +93.4% 5d respectively.
This week all eyes will be on the Federal Reserve meeting where the central bank is expected to cut rates anywhere between 75 bps to 100 bps. Currently, the Federal Fund Target Rate is 1.0% to 1.25%. Additionally, investors will keep an eye on the Bank of Japan meeting and also on economic data release from China which should throw some light on the economic damage from the coronavirus.
The sharp decline in global equities can be traced back to investors’ flight to safety. The Bloomberg Haven Assets index has rallied c. +4.5% ytd compared to a -20.0% ytd decline in the MSCI All Country World index. It is the biggest divergence between the two indices since 2018. The Bloomberg Haven Assets index covers the USD, JPY, CHF and government bonds in developed markets.
Regional markets had one of their worst trading weeks as they dropped to multi-year lows. The continued restriction in some economic activities due to coronavirus and the sustained fall in oil prices weighed on investor sentiment. The S&P Pan Arab Composite index lost -8.4% 5d.
The broad based decline was precipitated further by likely margin calls. The DFM index and the Tadawul dropped -17.4% 5d and -14.9% 5d respectively. Emaar Properties dropped -21.6% 5d to close at levels last seen in 2012 while ADCB declined -23.1% to close at its lowest since 2016. Unsurprisingly, oil-related stocks bore the brunt of sell-off in Saudi Arabia. Sabic and Saudi Aramco declined -15.6% 5d and -12.1% 5d following a -25.2% 5d drop in Brent oil prices.
Over the weekend, the central banks of Saudi Arabia and the UAE announced stimulus packages that are aimed at boosting liquidity in the banking system and provide support to small and medium enterprises. As part of the announcement, the UAE Central Bank said that the maximum loan-to-value of mortgages for first time buyers has been increased to 80% from 75% previously and the ceiling of bank’s exposure to the real estate sector has been raised from 20% to 30% subject to additional capital buffers. Further, the government of Dubai announced additional measures to support private sector businesses and households.
Developed market equities closed sharply lower as worries over the economic impact of the viral outbreak outweighed measures of fiscal and monetary support announced by various governments and central banks. The Bank of England and the Bank of Canada cut interest rates by 50 bps while the European Central Bank refrained from cutting rates and instead announced a stimulus package consisting of targeted measures aimed at helping companies stay in business and banks to keep lending.
Overall, the S&P 500 index, the Euro Stoxx 600 index and the Nikkei index dropped -8.8% 5d, -18.4% 5d and -16.0% 5d respectively. The moves on the S&P 500 index triggered circuit breakers twice last week as daily change exceeded 4% every trading session last week.
Energy stocks led the decline with the S&P 500 Energy sector (-24.0% 5d) having its worst week since October 2008. According to data from Bloomberg, the sector lost nearly USD 196bn in market capitalization last week.
Emerging market equities were no different as all major market indices closed sharply lower. The MSCI EM index lost -12.0% 5d to take their year to date losses to -20.0%.
Chinese equities outperformed with the Shanghai Composite index losing only -4.9% 5d as the pace of the viral outbreak in the country slowed considerably. The People’s Bank of China cut the reserve ratio requirement of some banks to release as much as USD 79bn of liquidity.
GCC Equity Flow Monitor - May 2020