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Aditya Pugalia - Director, Financial Markets Research
Published Date: 22 July 2018
Global equities closed marginally higher as positive investor sentiment was countered by fresh concerns over trade wars. In fact, US President Donald Trump opened another front by openly accusing the European Union and China of currency manipulation and chided the Fed for raising interest rates. The MSCI World index added +0.2% 5d helped by gains in the MSCI G7 index (+0.1% 5d) Volatility increased in developed markets with the VIX index and the V2X index adding +5.6% 5d and +7.6% 5d respectively.
With US President Donald Trump continuing with his habit of tweeting randomly about issues including monetary policy, trade and currency manipulation, it is becoming hard for investors to remain sanguine and pay attention to the positive earnings story. This is likely to breed uncertainty in financial markets leading to high volatility. Regionally, investors are likely to concentrate on the earnings season and corporate news flow.
Federal Reserve Chairman Jerome Powell in his testimony last week remained confident about US economic growth and indicated that the current strategy of slow and consistent rate rises remain the right one for now. It is worth noting that the correlation between the performance of the S&P 500 index and the US financial condition index has strengthened since the start of 2018. This becomes important when looked in context with other central banks also indicating that they would be looking to start taking liquidity out of the system over the next six to nine months.
It was largely a positive week of trading for regional equities even though the region continues to lack a clear trend. The S&P Pan Arab Composite index added +0.9% 5d.
UAE bourses closed higher with the DFM index adding +0.7% 5d and the ADX index gaining +1.4% 5d. The broad indices were helped by strong earnings from market heavyweights including Emirates NBD. Emaar Properties added +2.4% 5d following reports that the company is looking to raise USD 1.4bn by selling non-core assets including hotels, clinics and schools. The company acknowledged the reports and said that it ‘regularly considers various options as part of its strategy to streamline its business and generate significant value for the company’. The proposed asset sale is being linked to concerns over the pace of sales in Dubai real estate market. The stock has lost -21.4% year to date.
The Tadawul built on gains of last previous week with a rally of +0.5% 5d. Sabic ended the week with gains of +2.2% after reports of talks between Saudi Aramco and Public Investment Fund for a stake in Sabic. Saudi Arabia’s sovereign wealth fund owns 70% of Sabic which has a market capitalization of c. SAR 389bn. The CEO of Saudi Aramco said that a potential stake in Sabic would reduce the vulnerability of Saudi Aramco to volatile oil prices. The proposed buying of stake in Sabic is a clear tell-tale signs that the IPO of Saudi Aramco has been put on the back burner at the moment.
Developed market equities closed marginally higher as continued momentum from strong corporate earnings were offset by tweets from Donald Trump on trade and currency wars. The tweets from the US President suggests that he is willing to go the whole hog on the trade front as he opened another front regarding currency manipulation by China and the Eurozone. The S&P 500 index closed flat, while the Euro Stoxx 600 index and the Nikkei index added +0.2% 5d and +2.3% 5d respectively. It is interesting to note that the broader US equity market held up reasonably well despite the underperformance of the FAANG stocks. The ML FANG index dropped -2.1% 5d.
The earnings season in the US got off to a positive start. With nearly 17% of S&P 500 companies having reported earnings, 87% of those have reported a positive EPS surprise and 77% of those have reported a positive sales surprise. According to FactSet, the blended earnings growth rate stands at 20.8% compared to growth estimates of 20.0% at the end of Q2 2018.
Emerging market equities underperformed broad equity markets as the USD strengthened for the better part of last week and the Chinese Yuan resumed its decline. Emerging market assets did pare some of their losses following tweets of Donald Trump on USD strength. The MSCI EM index dropped -0.5% 5d compared to a gain of +0.2% in the MSCI World index. Elsewhere, Turkey’s BIST 100 index added +4.7% 5d to recoup some of its recent losses.
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