Dubai: So, will this be the ‘Year of the Bear’?
On Monday, the S&P500 in the US slipped into ‘bear mode’, with the index down over 20 per cent from its January high. And in Asia early Tuesday, key indices – Nikkei, Hang Seng – are in the red, while India’s Sensex shed 1,400 points on Monday but started Tuesday trimming losses. So far, in Asia, it has not been a market bloodbath as many had feared. Clearly, investors, for now, seem to be taking a lot of hope from US stock futures trading in positive territory.
The next 72 hours would then provide a better glimpse of where global stock markets, currencies and assets are likely to head, with the US Federal Reserve to announce another rate hike Thursday. Will this be the 0.50 per cent increase that everyone had been planning for since May? Or will the Fed feel the need to get more aggressive on rate hikes and go in for a 0.75 per cent increase? And match that with another hike in July?
"With the S&P500 now off by more than 20 per cent from its recent record closing high, the index has officially entered bear market territory, suggesting some very challenging market conditions to come in the next few days and weeks at least," said Simon Ballard, Chief Economist, Market Insights & Strategy - Global Markets at FAB. "Well, that is certainly what it looks like at the moment as central banks promise - or should that be threaten? - to do whatever it takes to halt the current rise in global inflation."
A 'golden' phase?
As always, when things turn dicey for markets, gold comes roaring back into contention. Gold prices dropped $50 an ounce to be at $1,821 an ounce. Watch out for some more action in the next few days.
Mohammed Shaheen, CEO of Dubai-based Seven Capitals, isn’t too keen about cramming in too many rate hikes as a counter to curbing inflation. “If they hike rates too fast, they risk depressing the economic recovery after Covid and even tipping economies back into recession,” he said.
Central banks around the world are attempting to push inflation down by raising rates, encouraging savings rather than spending.
"(For investors), the best hedge against inflation, historically, depends on the time frame. Commodities are often cited as a good bet for keeping up with the cost of living, especially gold."
UAE stock markets hold up
On Monday, the DFM closed 2.64 per cent down, with all the blue-chips showing up in red, and in Abu Dhabi, the key index was in negative 1.78 per cent. Real estate stocks could be under pressure as investors factor in the next rate hike this week and what this would mean for mortgage demand among end-user property buyers. Plus, what it would mean for overseas investors as the dollar keeps gaining in strength against other currencies.
By Tuesday post-noon, DFM was trading flat, with Air Arabia and DIB among the gainers, while ADX trimmed overnight losses and was 0.696 per cent up at 2.30pm.
According to Vijay Valecha, Chief Investment Officer at Century Financial. “The FTSE ADX and Saudi’s Tadawul both clocked a 11 per cent return on a year-to-date basis. Gulf markets too would face further market declines as oil prices would also face pressure on account of heightened economic worries.
However, the intensity would be far lesser than global peers as a slew of IPOs would boost liquidity and attract foreign inflows. The UAE and Gulf countries are also witnessing their budgets returning to surplus this year as crude oil prices stay above $100 per barrel. The higher GDP numbers show resilience to withstand the market turbulence.
Gold turns shopper-friendly
Now might be a good time to look at gold again, especially if you are a shopper. International bullion price is at $1,821 an ounce at 2.30pm. The Dubai Gold Rate is at Dh207.75 a gram and will drop further when the first pricing of the day is announced shortly. This is easily the most accessible level gold has been for shoppers in recent weeks – shoppers in the UAE will however be waiting to see more price drops before they venture to pick up more gold.
“Gold prices are under pressure as Wall Street reassess how aggressive the Fed will have to be to get inflation under control,” said Edward Moya, Senior Market Analyst at Oanda.
Gold will eventually see safe-haven flows - but that won’t happen until the dollar hits a peak. Recession risks are growing and that should ultimately be positive for gold prices.
Shares worldwide are seen dropping further, and the probability of falling into a bear (a period of prolonged decline) market - or a global recession - has undeniably increased.
The coming week will be pivotal in the battle against soaring inflation for global central banks and markets, with US Fed officials meeting to discuss their next monetary policy move. And the next rate hike.
The Bank of England’s monetary policy committee will announce its latest interest rate decision on Thursday, while the Bank of Japan, Swiss National Bank and Brazil’s BCB also meet this week.
Broadly speaking, investors will comb the upcoming data for recessionary signals, with any signs of activity strength expected to put further upward pressure on rate expectations.
The pressure is on central banks to retain some semblance of control over rate trajectory narratives, despite having been proved hopelessly wrong on inflation.
While there are no ideal hedges against a global inflation and a recession, a safe-haven asset like gold comes close to helping investors weather the storm.
Alongside gold, other commodities have historically proven to be realistically good at protecting your investments from inflation over the long run. Although stock markets are in turmoil, the world’s energy sector still has room to grow with the cost of oil and gas indicating further growth momentum.
Logically, as prices rise, so should energy related stocks.
What will trigger the next sell-off?
The latest sell-off is almost certain to push global shares into a bear market, coming on the heels of hotter inflation data that showed consumer prices accelerating more than expected in key economies.
Although world stocks dropped over 3 per cent, losses have narrowed compared to Friday. This implies that the consumer price figures are yet to unnerve investors as we are yet to see panic selling. But signs indicate it's coming, because a fall below than where indices are at could spur more investors to flee from stocks.
The recent market move quashed bets that central banks were gaining the upper hand in taming soaring prices. This is amid simmering speculation that the US could hike interest rates by 75 basis points at its policy meeting this week, with intensified expectations that US rates would peak at around 4 per cent next year.
Where interest rates peak in the US and other major economies is the question for investors, and which could help determine stock valuations and how much further global markets could fall.
- Justin Varghese
Bitcoin’s struggles
A safe haven? Not by a stretch. Bitcoin’s price struggles continue, though there has been a slight improvement from Monday’s closing at $20,800. Bitcoin is now trading at $21,929.
So, should crypto investors ride out this storm by sticking to the sidelines? “Investors shouldn’t be trying to day trade Bitcoin, and rather look at the longer-term play for it,” said Fred Pye, CEO and Chairman of 3iQ Corp., which has a crypto fund listed on Nasdaq Dubai. “Bulls in this market will typically wait to see stability versus trying to call the bottom. We can expect a return to the bull market in the next year or so.”
