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Aditya Pugalia - Director, Financial Markets Research
Published Date: 28 October 2018
Global equities closed sharply lower as multiple factors weighed on investor sentiment. These included the political flare-up in Europe, the lack of progress on the trade front and mixed trends on corporate earnings. Strong economic data from the US lent further credence to the viewpoint that the Federal Reserve will continue to raise interest rates irrespective of its impact of financial markets. The MSCI World index closed lower for a fifth consecutive week with losses of -3.9% 5D. The stretch of weekly losses is the first such instance since the middle of 2013. Volatility jumped across the board. The VIX index, the V2X index and the CBOE EM ETF Volatility index added +21.5% 5d, +26.4% 5d and +18.7% 5d respectively.
While the focus of investors’ will continue to remain on the ongoing Q3 2018 earnings season, it will also increasingly turn towards the political developments in the US (mid-term elections) and Europe (Italy and Germany). Regionally, flows are likely to be driven by earnings and evolving geopolitical conditions.
The S&P 500 index lost -3.9% 5d to take its 1-month losses to 8.8%. It also wiped out all of its year to date gains and is on track to have the worst month since February 2009. Unless recovered in the remaining three trading sessions of the month, it will be the worst monthly performance of the current bull run.
It was a mixed week of trading for regional equities amid a weak global backdrop, mixed geopolitical developments and continued correction in oil prices. The S&P Pan Arab Composite index rose +1.2% 5d while Brent oil dropped -2.7% 5d.
UAE bourses closed lower with the DFM index losing -0.8% 5d and the ADX index dropping -2.1% 5d. Corporate earnings dominated flows as market heavyweights reported earnings. First Abu Dhabi Bank reported Q3 2018 net profit of AED 3.02bn (-1.0% q/q, +16.0% y/y) on the back of continued improvement in efficiencies and relatively strong credit growth. The stock ended the week -4.5% lower. DP World gained +2.4% 5d even as the company reported weaker than expected operating metrics. The company’s Q3 2018 gross volume dropped to 18mn TEU from 18.3mn TEU last year. The company attributed the decline to trade uncertainty and weakness in UAE volumes.
Developed market equities closed lower across the board. While there was no explicit trigger, the continuance of geopolitical uncertainty and overhang of trade talks coupled with mixed corporate earnings weighed on investor sentiment. Stronger than expected US GDP data of 3.5% for Q3 2018 did little as investors’ focused on the breakdown of components which indicated that certain parts of the economy are starting to feel the impact of rising interest rates. In Europe, budget politics continued between the EU and Italy even as the ECB deviated little in their latest guidance on QE and rates from their last meeting. Eventually, the S&P 500 index, the Euro Stoxx 600 index and the Nikkei index dropped -3.9% 5d, -2.5% 5d and -6.0% 5d respectively.
The broad earnings season in the US remained strong. With c.48% of companies in the S&P 500 index reporting earnings, 77% of those reported a positive earnings surprise while 59% reported a positive sales surprise. According to Factset, the blended earnings growth for Q3 2018 stands at 22.5%. If this remain true at the end of the earnings season then it will mark the third highest earnings growth since Q3 2010. However, it is worth noting that for Q4 2018, 26 companies on the S&P 500 index have issued negative EPS guidance compared to 15 who have issued positive EPS guidance.
Emerging market equities outperformed broader equities. The MSCI EM index dropped -3.3% 5d compared to a decline of -3.9% 5d in the MSCI World index. The outperformance can be attributed to the strength in Chinese and Brazilian equities. The Shanghai Composite index and the Bovespa index ended the week with gains of +1.9% 5d and +1.8% 5d respectively.
Chinese stocks derived their strength from verbal intervention by government officials. The President pledged support to the private sector, proposed to cut personal income taxes and bolster equities by tweaking rules around share buy-backs and private equity investments into stocks. In effect, it was a quasi-fiscal stimulus by the government. However, it is worth noting that the effects of the announcement faded as the week progressed. Elsewhere, Brazilian equities gained as investors bought ahead of the final round of elections later today where the right leaning candidate Jair Bolsonaro is expected to win easily.
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