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Aditya Pugalia - Director, Financial Markets Research
Published Date: 09 December 2018
Global equities closed sharply lower as combination of skepticism over the US-China trade truce and fear of economic slowdown weighed on investor sentiment. The lack of coherent response from the US and China, arrest of the CFO of Huawei and tweets from Donald Trump negated the apparent progress made between the two countries at G-20. The fears of slowdown in growth was fuelled by inversion of the yield curve in the US and mixed economic data. The rebound in commodity prices did little to assuage risk-off mood. The MSCI All Countries index lost -3.5% 5d with all major sub-indices closing lower. The MSCI G7 index and the MSCI EM index a dropped -4.0% 5d, and -1.3% 5d respectively. Volatility increased across the board. The VIX index, the V2X index and the CBOE EM ETF Volatility index moved +28.6% 5d, +17.2% 5d and +6.1% 5d respectively.
The early part of this week will see the UK Parliament vote on Brexit deal. While the deal is widely expected to be rejected, the uncertainty over the chain of events following the vote is expected to drive volatility in financial markets. Additionally, the markets will be watching out for any comments on the progress of negotiation between the US and China, details on Mueller probe in the US, election results in India and reaction to the OPEC deal over the weekend.
It is interesting to note that despite the sharp moves in financial markets in the recent past, volatility across asset classes are relatively low by historical averages. The VIX index is currently at 23.2, lower than the highs seen during similar phases of correction earlier in the year. The trend is similar for V2X index as well which is currently at 21.7.
Source: Emirates NBD Research, Bloomberg
MENA equities closed mixed amid a weak global backdrop and a late rebound in oil prices. Having said that, the performance variance amid regional markets was quite wide. The MSCI Arabian Markets index dropped -0.3% 5d while Brent oil gained +5.0% 5d.
UAE bourses closed mixed in a shortened week of trading. The DFM index dropped -3.3% w-o-w while the ADX index added +2.2% w-o-w. In continuance with the recent trend, the focus was on real estate sector stocks and their underperformance relative to the broader index. Emaar Properties dropped -5.6% w-o-w, Aldar Properties declined -1.3% w-o-w and Emaar Development lost -4.2% w-o-w following data from Dubai Land Department which indicated that the slowdown in demand remains persistent.
Egyptian equities closed sharply lower. The EGX 30 index lost -7.0% 5d to take its year to date losses to -18.4%. It appears that proposed changes in the tax system on T-Bills continues to weigh on investor sentiment. The EGX30 Banks index lost -5.8% 5d to take its losses to over 10% since the announcement.
Developed market equities closed sharply lower across the board as skepticism over the US-China trade ceasefire, fears of an economic slowdown and conjectures over the Federal Reserve moves weighed on investor sentiment. The inversion of the treasury yield curve at the front end, weaker than expected non-farm payrolls data and the arrest of the CFO of Huawei Technologies in Canada at the request of the US fuelled those concerns. The S&P 500 index, the Euro Stoxx 600 index and Nikkei index dropped -4.6% w-o-w, -3.4% w-o-w and -3.0% w-o-w respectively. All major indices are now in negative territory for the year. Interestingly, despite the recent sell-off, Nasdaq is still positive for the year with gains of +1.0% ytd.
The sectoral breakdown of performance reflected the concerns at the top of investor minds’ i.e., rates and trade. The MSCI US Banks index lost -6.1% w-o-w and the MSCI US Industrials index declined -6.2% w-o-w.
Emerging market equities outperformed broader equities. The MSCI EM index dropped -1.3% 5d compared to a decline of -3.7% 5d in the MSCI World index. The relative outperformance can be put down to easing of factors which were weighing on investors’ at the start of the year i.e., higher oil prices and higher US rates. Despite an OPEC agreement at the end of last week, Brent oil prices have corrected -20.0% over the last three months and 10y UST yields are now back at levels last seen in August of this year.
Indian equities closed lower as the Reserve Bank of India retained ‘calibrated tightening’ stance even as it sharply lowered inflation projections and kept interest rates on hold. However, the RBI did signal that it remains open to adjusting monetary policy should the upside risks to inflation not materialize. The immediate direction of stocks markets will be dictated by the election results of key states scheduled to be announced later this week.
A positive week for global equities
US payrolls conclude a gloomy week