By Tanya Rawat
While the Dubai and Saudi stock exchanges have been reaping gains from the rebounding oil prices, it’s time to start building up cash reserves into GCC portfolios.
There are three vital signs of imminent correction and why the timing is perfect for this approach. Since the start of the year both the DFM (the Dubai exchange) and Tadawul (the Saudi Index) have been stuck in a pretty tight price range (meaning that the markets have been moving sideways without meaningful direction) — the former at 3,380 wavering at +/-5.50% and the latter more tightly squeezed around the 7,000 level at around +/-3.50% on a weekly basis.
Secondly, the S&P 500, a leading US equity market index that dictates the direction of markets around the world, has been unable to sustain the rally after breaching the 2,400 price level since the start of the year and always falls back below that key level. As it nears this level again, it is unnerving as this time it’s laden with the fact that two of its largest constituents; infotech (tech firms like Apple and Google), and financials (banks like Goldman Sachs, Wells Fargo and others) are poised to reach critical overbought levels. The infotech tech is shy off 3-4% off price the highs it saw in the year 2000 while financials have been trying to breach the 400 price level to sustain a stronger rally, however always fall below this level. Additionally, the weekly price data change shows sectoral rotation (change in portfolio allocation across sectors) in the S&P 500 into defensive names, such as consumer names, utilities and healthcare and out of cyclicals akin to infotech and financials.
Finally, for a month now, the benchmark US 10-year treasury yields appeared stuck below and around a pivot point of 2.30 yield level, which means declining consumer inflation expectations. Going forward, it is likely to decline further due to the falling yield spread between 10-year U.S. Treasuries and similar-maturity Treasury Inflation Protected Securities (TIPS), which measure investors’ expectations for average annual consumer-price gains over the next decade. They have also been retreating. Moreover, the Core PCE print, which is a key inflation measure employed by the Federal Reserve, has been coming in below the 2% print since February this year; a magic threshold set by the Central Banks around the world. This signals a strong case for keeping the rate hike on hold in June, which implies further headwinds for the GCC as it will likely stifle the rally in the US stock markets.
The fragility of the US financial markets are finally converging to what the economic data has been pointing to over the past two quarters of weak data like declining consumer spending and muted industrial production in the U.S. Durable goods orders which constitute 15% of the largest contributor to GDP (consumption) have also been painting a troubling picture with the recent rise in auto sector loan delinquencies across US.
So despite the positive beta rewards the GCC stock market has been reaping from oil price strength, there are still plenty of clouds to watch in the global financial space. CFTC (Commodity Futures Trading Commission) data shows robust ongoing consolidation move into haven assets like gold reflecting increasing risk-off sentiment or risk averseness. Time to deploy those cash reserves.
Questions? Comments? Contact me at Tanya@rawatspeaks.com.
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