Aditya Pugalia - Director, Financial Markets Research
Published Date: 08 July 2018
Global equities closed higher despite the start of a new phase in the current trade war with the imposition of tariffs by the US and China. The continued strong economic data from the US and the start of the Q2 2018 earnings season seemed to have helped risk appetite. The MSCI World index added +1.2% 5d helped by a rally of +1.1% 5d in the MSCI G7 index. Emerging markets continued to underperform with the MSCI EM index losing -0.9% 5d. Volatility declined across the board with the VIX index, the V2X index and the CBOE EM ETF Volatility index dropping -20.7% 5d, -11.4% 5d and -7.4% 5d respectively.
While risks around global trade remain an overhang, investors are likely to pay greater attention to the start of the Q2 2018 earnings season. Earnings have been the strongest pillar of support for global equities and hence any slip-up on that front could lead to re-pricing of risk assets. Investors would also be keen to hear from companies about the potential impact they envisage on their businesses from tariffs.
With global trade currently in focus, it is worth noting that industrial stocks have underperformed since the start of the year. The fact that economic data continues to remain strong, the underperformance can possibly be linked to the ongoing trade war between the US and rest of the world. The S&P 500 index has gained +3.2% ytd compared to a decline of -4.9% ytd in the S&P 500 industrials index. Over the last three months, the S&P 500 industrials index has lost -0.6% compared to a gain of +5.6% in the S&P 500 index.
Source: Emirates NBD Research, Bloomberg
It was largely a positive week of trading for regional equities. The flows were largely dictated by corporate news flow in single stocks and after effects of actions announced by index providers in the previous month.
UAE bourses closed higher with the DFM index and the ADX index adding +2.1% 5d and +1.0% 5d respectively. Drake & Scull dominated flows as the stock closed limit down for two of the five trading session. Eventually, the stock closed at its lifetime lows with losses of -15.4% 5d. The decline was on account of shares being sold on margin calls by a financial firm who had them as collateral. On the operational side, the company appointed a new CFO. The previous CFO was appointed as the chief restructuring officer.
The Kuwait Premier Market index was the best performing regional equity index with gains of +5.4%. It does appear that foreign investors are actively investing in the market ahead of the market’s inclusion in the FTSE Russell EM index in September. The same is evident in rising volumes on the exchange. The average volume in the past week was c. USD 100mn compared to 3-month average daily value traded of USD 40mn. National Bank of Kuwait (+5.3% 5d) and Zain Kuwait (+9.0% 5d) were the biggest beneficiaries.
Elsewhere, concerns over Bahrain’s fiscal balances, evident in the fixed income market, had no impact on equity markets. The Bahrain All Share index added +1.5% 5d and is now flat for the year.
Most developed market equities closed higher in what was a classic epitome of ‘sell the rumor and buy the fact’. Trade tariffs became a reality towards the end of the last week as both the US and China went ahead with proposed tariffs. There were little signs of any talks being held to diffuse the situation. In fact, the current trade war has extended beyond the US and China with Russia also joining other countries in imposing tariffs on US goods.
It does appear that the recent shift in risk appetite was on account of continued better than expected macroeconomic data from the US. The fact that minutes from the last Fed meeting showed no hawkish surprise also helped investor sentiment. Eventually, the S&P 500 index, the Euro Stoxx 600 index and the Nikkei index ended the week with moves of +1.5%, +0.6% and -2.3% respectively.
Emerging market equities underperformed wider equity markets. The MSCI EM index dropped -0.9% 5d compared to a gain of +1.2% 5d in the MSCI World index. China’s Shanghai Composite index was among the worst performer with losses of -3.5% 5d. While the ongoing trade war remains the main concern, other factors like slowing economic growth and continued deleveraging process are also weighing on investor sentiment.
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