China worries impact commodity prices and shares
Stock markets across the GCC have continued their precipitous falls on Thursday 20 August and Sunday 23 August, reflecting volatility in global equities.
After having stabilised on 20 August, Saudi Arabias stock exchange, the Tadawul fell 5.9 per cent on 23 August.
The Dubai Financial Market was the worst hit, its index falling 3.2 per cent on 20 August and a further 7 per cent on 23 August. This follows corrections across the GCC markets since late July.
Analysts link the negative sentiment affecting equity markets to further falls in the price of oil, and global uncertainty, especially around the Chinese economy.
|GCC equity falls in August 2015|
|Market||Country||Daily percentage changes to main index (20 August)||Daily percentage changes to main index (23 August)||Main index year-to-date|
The GCC is following global trends, says an Abu Dhabi-based equity analyst. The negative sentiment around China is causing uncertainty in equities and on US federal interest rates. When stability is low investors pull out of risky assets such as equities and invest in lower risk assets like bonds.
International institutional investors have pulled about $26bn out of emerging markets in the last seven weeks, according to Bank of America Merill Lynch figures. The global trend has hit the GCC hard in the last two weeks, despite its limited exposure to the Chinese economy.
In China, a Caixin/Markit purchasing managers index fell to 47.1 in July, where any number below 50 suggests a contracting economy. This, on top of weeks of stock market volatility there and a devaluation of the yuan as debt jitters through the world economy. However, GDP growth in China is still thought to be about 7 per cent a year.
The situation in China has increased volatility, and fears that they are fighting a slowdown, says Asjad Yahya, director at Dubai-based Shuaa Capital. But it is an indirect impact the markets are responding more to oil prices.
As one of the largest commodities consumers in the world, uncertainty around Chinas economy has pushed commodity prices lower.
China was the start, but this has had a big effect on commodity markets, which have been weak since January. The oil price is down sharply, to its lowest level since the financial crisis, says the Abu Dhabi analyst. Stabilisation will depend on what measures the Chinese and other governments take as a stimulus or easing.
Crude oil dipped to $40.45 on 21 August, according to Nasdaq, the lowest price since the financial crisis, and well below breakeven prices for GCC states. This is the main factor worrying investors in the GCC, where growth depends heavily on oil prices and government spending.
Several observers, such as the Washington-based IMF, have already revised their GDP growth predictions for GCC countries downwards. Their figures tend to be based on an average oil price of $55 a barrel.
It is a question of where oil prices will stop, says Yahya. The level where the price of oil settles will impact the level of government spending, support for the private sector and confidence. If we see governments pulling back there could be a significant economic impact.
As always, the outlook for the GCC economies depends on oil prices. If they stabilise or even recover stock markets could rally and wider economies will not be affected. But continuing negative sentiment in the global economy could keep prices low.
The question is whether this is the start of a bigger trend, ie a recession, or an overreaction, says Yahya. We may see a bounce soon after this aggressive correction, but will that be sustainable?
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