A weekly review: FATF, IMF and virus concerns hammer stock market

A staggering sum of Rs276 billion was wiped off the market capitalisation at the PSX in the week.

KARACHI (Dunya News) – As confusion and uncertainty surrounds potential investors due to several persisting factors, the stock market in the outgoing week lost massive 1,487 points or 3.6pc, representing the highest weekly decline in recent months during which the market regained much stability, and dropped to 40,143.63 at close on Friday.

A staggering sum of Rs276 billion was wiped off the market capitalisation at the Pakistan Stock Exchange (PSX) in five-day trading sessions. Foreign investors were net sellers in the equity market, offloading $4.1 million worth of shares.

Over the trading sessions, the benchmark KSE-100 share Index observed slight fluctuations in intra-day highs and lows, but overall closed in negative territories.

Investors adopted extremely cautious behaviour after more headlines cover mounting deaths due to coronavirus taking full hold, a plunge in global crude oil prices, unchanged main policy rate by the State Bank of Pakistan at 13.25 percent for the next two months, uncertain FATF’s decision and political uncertainty in the country.

The SBP in the latest monetary policy statement kept the interest rate unaltered and pushed selling in the leveraged sectors such as cement and steel. Concerns over higher than expected reading of inflationary pressures and political uncertainty sparked by coalition partners of the government also kept investors away from the market.

Moreover, the outcome of Financial Action Task Force in the upcoming review remained unclear. Several reports claimed that the substantial progress was made to pull the country out of the grey list, but Minister for Economic Affairs Hammad Azhar noted it was premature to speculate on any outcome.

They were also spooked by uncertainty over the decision by the Financial Action Task Force (FATF) on Pakistan status to be decided later this month and the country’s ability to pull itself out of the grey list. Investors were also rattled over the inflation figures for January which came out at an alarming 12-year high of 14.6pc.

Importantly, the investors have also strongly noticed shortfall in revenue collection by about Rs350 billion as review talks with the International Monetary Fund (IMF) have begun for the release of its third tranche under the $6 billion facility.

On political front, unsettled political wrangling among the coalition partners of the government also hit confidence of the investors.

Every year the Chinese New Year celebrations bring supply chains to a halt as factories in China shut down and workers head home for the holidays. This year, however, the outbreak of the 2019 Novel Coronavirus during these holidays has disrupted movements, with the Chinese authorities extending the shutdown to Feb 12 in most provinces.

Some traders and businessmen in Pakistan said that loading of goods in China has come to a halt.

Most industries that depend on raw materials imported from China usually build stocks to last them through the holiday closure, but in some cases at least those stocks are now running low and businesses are left wondering when normal imports might resume.

The PSX crashed on Monday by 1,222 points or about 3pc, representing the highest single day decline in 14 months. The market closed at 40,409.38 on Monday.

The KSE 100 index came crashing down as investors offloaded stocks as the rising prices of commodities eroded profits.

Global stocks fall on China virus fears to slow growth

Global equity markets and government debt yields slumped on Friday as growing concerns about the impact of the coronavirus on global growth overshadowed a strong U.S. jobs report that indicated an economy on pace to grow moderately.

Stocks on Wall Street slid from record highs and safe-havens gold and the Japanese yen rose as investors weighed how much the virus is likely to disrupt supply chains. China accounts for about one-third of global growth.

The better-than-expected U.S. labor report failed to move the market as typically occurs. Caution about the virus, which has inflicted 34,917 people and left 724 dead, dictated investor sentiment.

Nonfarm payrolls increased by 225,000 jobs in January, with employment at construction sites increasing by the most in a year amid milder-than-normal temperatures, the Labor Department said.

“Investors should be watching the effect of the coronavirus on the global supply chain and thus, on the global economy and corporate profits,” said John Vail, chief global strategist at Nikko Asset Management.

While the amount and duration of the effect remains unknown, there is a chance the Phase 1 U.S.-China trade deal will be severely hampered and bilateral relations worsen again, he said.

Global supply chains have grown far more integrated, so disruptions from China have bigger ripple effects around the world, said Ron Temple, head of U.S. equity at Lazard Asset Management in New York.

While the coronavirus will be disruptive, for long-term investors it may pose an entry point into equities, Temple said.

The economy is doing fine, the U.S.-Sino trade spat is on hold and there is no apparent catalyst for stock valuations to fall, he said.

“At the same time you got interest rates that are really low, so that feeds into an equity market with incremental upside,” Temple said.

MSCI’s gauge of stocks across the globe shed 0.62%, moving away from highs this week that were shy of a record peak set early in January.

Emerging market stocks lost 1.19% and the pan-European FTSEurofirst 300 index lost 0.25%, but the blue-chip index posted its best week since late 2016 on the week’s rally.

On Wall Street, the Dow Jones Industrial Average fell 283.99 points, or 0.97%, to 29,095.78. The S&P 500 lost 18.37 points, or 0.55%, to 3,327.41 and the Nasdaq Composite dropped 53.91 points, or 0.56%, to 9,518.25.

Benchmark 10-year U.S. Treasury notes last rose 19/32 in price to push yields down to 1.58%.

Euro zone bond yields fell after German industrial output data in December notched its biggest fall since January 2009, fanning concerns about the bloc’s biggest economy.

German industrial production tumbled 3.5% on the month, exceeding expectations of a 0.2% fall.

French industrial production fell more sharply than expected in December as factories contended with nationwide transport strikes and a broader European slowdown.

Germany’s benchmark 10-year Bund yield fell as low as -0.368%, before rising slightly.

The dollar slid and the yen rose after four days of selling, spurred by investor hopes China can contain the virus. The dollar index rose 0.19%, with the euro down 0.32% to $1.0945.

The Japanese yen strengthened 0.23% versus the greenback at 109.75 per dollar.

In Asian trade, the yen halted a slide that had it set for its worst week in 18 months.

The Australian dollar was on track for its first weekly gain this year, while the Singapore dollar and Thai baht have been trampled in a rush out of emerging markets.

Oil prices slipped as Russia said it would need more time before committing to output cuts along with the Organization of the Petroleum Exporting Countries and other producers amid falling demand for crude as China battles the coronavirus.

Brent crude futures fell 46 cents to settle down at $54.47 a barrel, while U.S. West Texas Intermediate (WTI) crude futures slid 63 cents to settle at $50.32 a barrel.

Gold steadies

Gold was little changed on Friday as a rally in global stock markets stalled as worries remained over the economic impact from the coronavirus while investors awaited U.S. jobs data for indications on the country’s economic health.

Spot gold was down 0.1% at $1,565.20 an ounce at 1259 GMT. Down about 1.6% this week, it was on track for the biggest weekly loss since early November.

U.S. gold futures also eased by 0.1%, dipping to $1,569.00.

“On one side, insecurities come back with jitters in European and Asian stock markets, which is supporting gold prices, but on the other side, we have a stronger dollar,” said Commerzbank analyst Eugen Weinberg.

Worries over the virus, which has claimed 724 lives and spread to numerous countries, pressured world markets that were on course for the best week for equities since June.

Weighing on bullion, however, the dollar rose to its strongest against major rivals since mid-October.

The safe-haven metal was on track for its biggest weekly decline in three months on the back of a series of strong U.S. economic data, including a drop in unemployment benefits.

Market participants are now awaiting the U.S. non-farm payrolls report, due later in the session, for cues on the strength of the labour market and the U.S. economy.

The payrolls data is “one of the most important indicators for the U.S. central bank” and investors want to know what the report would mean for the Federal Reserve moving forward, said UBS commodities analyst Giovanni Staunovo.

The Fed kept benchmark interest rates unchanged at its January policy meeting, citing moderate economic growth and a strong jobs market.

Lower interest rates reduce the opportunity cost of holding non-yielding bullion.

If the data comes in as strong as expected, the market might not react that much, but should the data disappoint then the U.S. dollar could snap back and fall, which is supportive for bullion, Commerzbank’s Weinberg said.

A weaker dollar makes greenback-denominated assets, such as gold, cheaper for investors holding other currencies. Elsewhere, palladium fell 1.5% to $2,312.32 an ounce but was on track for its first weekly gain in three.

Silver slipped 0.5% to $17.71, set for its worst week in two months, while platinum rose 0.6% to $966.94.