Traders at the Tadawul All Share Index in Riyadh. Saudi Arabia’s Tadawul index tumbled 7 per cent on Sunday, extending the global sell-off. Image Credit: Bloomberg

Dubai: Traders are expected to be wary before taking any positions this week as the wounds of last week’s sell-off are still fresh on their minds.

The Dow Jones Industrial Average shed more than 1,000 points on Wednesday and Thursday, only to recover 1 per cent on Friday.

The meltdown was caused after US president Donald Trump raised a red flag on the rapid rise in interest rates.

“There will be some caution among investors and we won’t see significant buying or selling. The first two days will set the tone for the rest of the week,” Nadi Bargouti, managing director, head of asset management at Emirates Investment Bank told Gulf News.

But overall, the markets have been overvalued even as investors have been conveniently ignoring headwinds on trade war or interest rates front among others.

“All things that we are talking about are not new. The trade wars the timing is not news driven or economic. Investors are trying to justify the forward earnings, which is 17 times earnings,” Bargouti said.

Traders will closely watch the third quarter earnings from companies in the US for direction.

“Thanks to Trump’s corporate tax cuts, a healthy economy, and to not to mention the recent upsurge in oil prices and share buybacks, third quarter US earnings are expected to be strong once again,” Fawad Razaqzada, analyst at Forex.com said.

According to FactSet, the S&P 500 is expected to post earnings growth of 19.2 per cent and revenue gains of 7.3 per cent for the third quarter, following a 25 per cent rise in earnings and a 10 per cent increase in revenues in the second quarter.

Emerging markets

The downside in emerging markets was limited compared to developed markets. The MSCI EM index dropped 2.1 per cent in the past five sessions, compared to a decline of 4.1 per cent in the MSCI World index.

“The outperformance can be attributed to weakness in the US dollar and easing of bond yields from the highs. Also, it could be a case of developed markets catching up with the fall in emerging markets in the recent past,” Aditya Pugalia, director, Financial Markets Research at Emirates NBD said.

Elsewhere, Indian markets were also engulfed in the meltdown that happened last week. Traders have been trying to get more evidence of deliverables of the promises that the Narendra Modi government gave in 2014, when they took power.

“With the Modi government, we had a lot of high hopes, and they are not getting delivered. Indian currency is a reflection of disappointment as economy has not delivered what investors had hoped for,” Bargouti added.

The S&P BSE SENSEX Index traded 2.15 per cent higher to be at 34,733.58. The index has shed more than 4,000 points from its all-time high of 38,989.65 struck in late August.

Oil prices

Oil prices were not spared the sell-off that mauled the global markets last week.

Brent crude rose 0.21 per cent to be at $80.43 per barrel on Friday, after losing 4.4 per cent in the previous week, while West Texas Intermediate closed half a per cent higher at $71.34 per barrel.

“An increase in general risk asset volatility will weigh on oil markets in the near term and a deeper push downward would appear the easiest direction of travel,” Edward Bell, commodities analyst with Emirates NBD said.

Oil has retreated almost 8 per cent after reaching a four-year high earlier this month.