US stocks plunged on Monday triggered by worries about inflation which resulted in cutting the fortunes of the world’s 500 richest people by $114 billion.
US stock market rebounded from its slump on Tuesday, in a highly volatile trading session. After initially sliding, the Dow Jones industrial average ended the day with its biggest jump in over a year – up 567 points.
However, stocks closed lower again on Wednesday after trading in a wide range again as interest rates climbed back toward multi-year highs.
Investors across the globe are finding it difficult time currently to decide on whether to buy the recent dips, or to remain on the sidelines until the dust settles. After gaining 1.2% on Wednesday, the S&P 500 closed 0.5% lower in the biggest reversal since 25 August 2015.
AMEinfo spoke to two experts about the impact of the US stock market’s volatility on the regional markets?
1. What is happening to global stocks? What makes them go up and down within 24 hours?
Hussein Sayed, Chief Market Strategist at FXTM: It has been absolutely a wild ride in global financial markets. The sell-off was triggered on Friday after U.S. bond yields climbed to a new four-year high. This has aggravated investors’ concern, that inflationary pressures will lead the Fed and other central banks to tighten monetary policies at a faster pace than previously thought, suggesting that the era of cheap money is coming to an end. Given that valuations are very high compared to historic levels, it can no longer be justified when inflation kicks off. However, economic fundamentals remain strong, which in my opinion will lead to buying the dips sooner than later, but expect volatility to remain high in the coming few days.
Zaki Ameer, founder of Dream Design Real Estate: The market turmoil started last week and got worse on Monday. It was triggered by the US Jobs report. According to the January data released last Friday, nonfarm payrolls grew by 200,000 in January and the unemployment rate was 4.1%. More importantly, average hourly earnings increased 2.9% year on year, the best gains since the early days of the recovery in 2009. So far, so good. So what happened? US consumer prices rose in December: Overall inflation has risen 2.1%, while core inflation is up 1.8%.
US Federal Reserve has a dual mandate. The American Central Bank’s governing council is deciding on the monetary policy based on two factors: inflation and maximum employment. Both indicators look good and therefore the Federal Reserve could increase interest rates more quickly than previously thought. These concerns triggered the stocks sell-off.
2. How is this affecting us regionally, i.e. stock indexes in the UAE, Saudi and why Kuwait was spared?
Hussein Sayed, Chief Market Strategist at FXTM: A global selloff always weigh on investors’ sentiment in the Gulf, it is not something new. The slump in oil prices gives an additional factor to sell equities in this part of the world.
Zaki Ameer, founder of Dream Design Real Estate: Shares in Dubai fell as much as 2.9% in early trading – their deepest mid-session fall in over 18 months – but recovered gradually throughout the day, eventually ending 1.5% lower. Saudi Arabia’s Tadawul opened off 2.1%, but pared losses to close down 1.6%. While we had some panic selling at the open, it increasingly became a case of people wanting to sit and watch rather than engage in a sell off.
3. What is your outlook for investors in the region?
Hussein Sayed, Chief Market Strategist at FXTM: Gulf equities remain relatively cheap when compared to other emerging markets. In 2017 markets failed to follow the trend in global equities due to slowing macroeconomic factors and political tensions. Of course, oil prices in the range of $65 – $70 should support appetite to regional stocks, however it requires political stability, improvement in economic outlook, and positive earnings surprises to ignite investors’ interest again. So far, I remain neutral on the region.
Zaki Ameer, founder of Dream Design Real Estate: The GCC markets are independent of the US and so I don’t expect to see much downward change in the gulf markets.
4. In comparison to the U.S., are stock valuations here restrained? Will the U.S. peg to dollar have any impact on the market here, negatively or positively, in the short to medium term?
Hussein Sayed, Chief Market Strategist at FXTM: There will always be a significant gap between valuations in the Gulf and U.S. markets. Comparing ratios of companies in the Gulf and the U.S. will not represent a fair comparison. But if we adjust valuations to macro differences, risk difference, and other factors, we will still find valuations here to be relatively cheap. The peg between U.S. dollar and GCC currencies plays a positive factor for regional equities, specifically at times of extreme volatility in currency markets. However, given that the Fed will continue tightening monetary policy and central bank in GCC are obliged to follow, the increased borrowing cost for firms will have a negative impact of earnings. The only sector that will benefit from higher rates is banks as net interest margins increase.
Zaki Ameer, founder of Dream Design Real Estate: Oil-exporting nations in the Gulf Cooperation Council, must peg their currency to the dollar because oil is sold in dollars. As a result, they have large amounts of dollars in their sovereign wealth funds. These petrodollars are often invested in U.S. businesses to earn a greater return. The AED to AUD is coming back to 1 month ago results, so the AED became weaker with the US pegging but as its stabilizing, the US sell off is coming back to its average position for the year of 2.85 against the AUD.