Most GCC markets extend gains as US recession fear fades

Market watchers called worries of a recession in the US economy “not in line with economic fundamentals”

by Gulf Business with Reuters

August 8, 2024

Image credit: Getty Images

Most Gulf stock markets rose in early Wednesday trade, on course to extend their comeback from an aggressive sell-off in global stocks earlier in the week triggered by fears of a possible US recession.

US Federal Reserve policymakers pushed back on Monday against the notion that weaker than expected July jobs data means that the economy is in a recessionary free-fall.

Markets are pricing in a 65 per cent chance of the US Federal Reserve cutting interest rates by 50 basis points in September, the CME FedWatch tool shows, compared with 85 per cent a day ago.

Monetary policy in the six-member Gulf Cooperation Council (GCC) is usually guided by the Fed’s decisions as most regional currencies are pegged to the US dollar.

“Last week, the market faced challenges: The Bank of Japan was unexpectedly hawkish, and the US labour market report showed unemployment rising to 4.3 per cent, causing rapid market reactions.

“However, trends are more important than single reports. The unemployment rise was mainly due to temporary layoffs from Hurricane Beryl, which should reverse next month. Even if the jobs report signals bigger issues, the Fed has tools to respond. With interest rates at 5.25 per cent-5.50 per cent and ongoing tightening, there’s room for action if needed. The Fed’s flexibility supports my positive outlook on stocks”, Sam North, market analyst at eToro said.

“Solid earnings growth is another reason to not panic. With most of the S&P 500 reporting, earnings are up 11.5 per cent annually, the fastest since late 2021, and revenues have grown for 15 quarters straight. US GDP grew by 2.8 per cent in the second quarter, continuing a trend of over 2 per cent growth in seven of the last eight quarters.”

“While the ISM Manufacturing PMI falling 1.7 per cent in July raised concerns, one report doesn’t mean the economy is in trouble, especially in an election year with expected fiscal support,” North added.

UAE markets

Dubai’s main share index rose 2 per cent, led by a 4.2 per cent jump in blue-chip developer Emaar Properties.

Meanwhile, Dubai’s main airport is on track to handle a record number of passengers this year after an 8 per cent year-on-year increase in the first six months, operator Dubai Airports said on Wednesday.

In Abu Dhabi, the index added 1.4 per cent.

The Qatari benchmark, however, eased 0.2 per cent, hit by a 0.1 per cent decrease in its biggest lender Qatar National Bank.

Aramco’s performance

Saudi Arabia’s benchmark index gained 0.8 per cent, with oil giant Saudi Aramco advancing 1.7 per cent.

Aramco will buy from Japan’s Sumitomo Chemical a 22.5 per cent stake in their petrochemical joint venture Petro Rabigh for $702m, the companies said on Wednesday, outlining a turnaround strategy for the loss-making venture.

On Monday, Aramco reported a second-quarter net profit of SAR109.01bn ($29.04bn), beating a company-provided median estimate from 15 analysts of SAR$27.7bn.

Commenting on the recession worries which triggered the global stock market freefall, Aramco CEO Amin Nasser, called the worries “premature.” He added, “The market in my view is overreacting and the fundamentals do not support the drop in prices that we are witnessing today,” Nasser said on an earnings call.

He underscored his point by highlighting the oil demand in the American market, “The US is pointed (to) as a concern driving the current reaction that we are seeing in the market. Yet, the amount of finished gasoline supplies in the US, a proxy of demand, jumped to 9.4 million barrels a day in May, the highest since 2019.”

Analyst outlook

North concurs with Nasser’s outlook, “Technically, the market has been influenced by the carry trade, where investors borrow in low-yield currencies to invest in higher-yield ones. The yen was popular for this, but recent moves by Japan’s Ministry of Finance and a hawkish Bank of Japan caused volatility and unwinding of these trades, as well as other markets including equities and commodities like gold.

He concluded that “recent market moves seem overdone and not aligned with economic fundamentals or monetary policy. I believe stocks will continue to rise in the medium term, though the path might be bumpier.”

Read: Aramco CEO expects demand growth of 2 million bpd in second half