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Aditya Pugalia - Director, Financial Markets Research
Published Date: 29 September 2019
Global equities closed lower as political risk in developed market gathered pace and the US economy showed mixed signals ahead of trade talks with China early next month. The MSCI All Country index dropped -1.1% 5d on the back of weakness across major sub-indices. The MSCI G7 index and the MSCI EM index dropped -1.0% 5d and -1.9% 5d respectively. Volatility increased across the board with the VIX index, the V2X index and the CBOE EM ETF Volatility index jumping +12.4% 5d, +13.6% 5d and +25.0% 5d respectively.
With economic growth showing signs of weakness, investors will be keeping a close eye on first-tier economic data coming out of the US including the non-farm payrolls data. In the EM space, the meeting of Reserve Bank of India will be watched as the central bank is widely expected to cut interest rates despite the fiscal stimulus recently announced by the government.
With the earnings season only a week away, it is worth noting that the strength in USD is generally negative for corporate earnings in the US. With the DXY index currently at the highest level since mid-2017 it would be interesting to see if companies highlight it as a factor when they report earnings. In 2015-2016, the strength in USD did have a significant impact on corporate earnings. Having said that, it should also be noted that the strength in the USD is not as widespread against all currencies as in 2015-2016.
Regional equities closed mixed as reports indicated a very limited, if any, impact from disruption in oil supplies from Saudi Arabia. The fading away of technical factors i.e., flows related to inclusion in the broader indices also helped some markets. Overall, the S&P Pan Arab Composite index ended the week +0.4% 5d.
UAE bourses closed lower with the DFM index and the ADX index dropping -0.5% 5d and -1.0% 5d respectively. Real estate sector stocks remained under pressure for a second consecutive week. Emaar Properties and Aldar Properties dropped -3.9% 5d and -2.8% 5d respectively.
The Tadawul rallied +2.7% 5d on the back of strength in petrochemical stocks. The Tadawul Materials index had its biggest weekly gain since June 2019 as it closed +3.1% as most companies reported normalization in feedstock supplies. In terms of other stocks, Saudi Ceramic stood out with gains of +13.5% 5d amid reports that an anti-dumping investigation within the GCC which is likely to conclude before the end of 2019 is likely to be a positive catalyst for the company.
A lot more clarity also emerged on the potential timeline of the Aramco IPO. According to reports, the company is likely to formally announce the IPO sometime in the third week of October 2019 with listing sometime in November 2019. The primary listing is likely to be on the Tadawul with secondary listing venue to be decided later. It is also possible that at first instance the company will only sell 1% of the company.
Elsewhere, the EGX 30 index dropped -6.0% 5d amid reports of protests. Most of the losses came in the first half of the week and the market regained strength towards the second half of the week. After the weekly close, the Central Bank of Egypt also announced a 100 bps reduction in interest rates in a third such move this year.
Developed market equities closed lower as political risks increased in the US and the UK. Further, there were reports that the US government was considering a move to limit US investment in Chinese companies. While this could be seen as a mere negotiating tactic by the US ahead of formal talks early next month, it does have the potential to derail the series of goodwill gestures taken by both sides in the lead-up to talks. Overall, the S&P 500 index, the Euro Stoxx 600 index and the Nikkei index dropped -1.0% 5d, -0.3% 5d and -0.8% 5d respectively.
Emerging market equities underperformed the broader market as risk sentiment in developed markets soured. Worries over economic growth in several emerging markets’ also weighed on investor sentiment. The MSCI EM index dropped -1.9% 5d compared to a decline of -1.0% in the MSCI World index.
The Shanghai Composite index dropped -2.5% 5d as the China Beige Book showed that the economy was the weakest it has been in 2019 with manufacturing, property and services sector all worsening. The report added that manufacturing revenue, profits, volumes and sales prices dropped at double digit pace compared to the previous three months.
GCC Equity Flow Monitor
Global equities closed higher
Global equities closed marginally lower