The recent market crashes have been dramatic but GCC equities had been suffering for some time – Black Monday was just another hard hit for them. Local markets have been under pressure for over six months due to the crash in oil prices which started last year and is on-going.
The main regional markets, including Saudi, Abu Dhabi and Dubai are now in a bear run having lost more than 20% of their value. It is very clear that these losses, and Black Monday, has help push investors away from local stocks, leading them to look for other opportunities to cover their investments or to hedge themselves against the recent declines.
In the last two months we have seen Middle Eastern investors rush into the FX safe-haven products, and of these the ‘star’ has been the Japanese Yen. We have seen USDJPY volume increased by more than 100%. The euro also acted as a safe-haven with volumes up by 54%, and cable, GBPUSD, volume increased by 33%.
In just two months, July and August, as equities edged lower often suffering from increased levels of profit taking at the end of each week, the trading of FX products as a whole increased by more than 22%. The general collapse in emerging markets and further sharp declines in oil all helping to fund the move. In fact as soon as oil fell below US$70 a barrel we started to see greatly increased regional FX volumes.
Having invested in FX the Middle Eastern traders are all waiting for and pricing in the US Federal Reserve’s rate hike. Many reports, a lot of research, analysis and publications, as well as the local media are still positive about a hike, but we are advising more caution. The Fed has a long history of delaying rate hikes but sometimes events overtake economics, so no-one can be 100% certain about what will happen.
Those with long memories will recall 1998, when the Federal Reserve was promising the world it would raise the Fed Fund Rate. Back then the emerging markets collapsed on massive outflows and the Fed, instead of raising the rate, was forced to cut it three times. This time, the rate is already low and cannot go lower. With the risk of global deflation due to declining prices in commodities, the Fed has no option to cut, but it may delay the rate hike again. This would be another opportunity for investors and the markets to stabilize, reposition, start looking for new opportunities and evaluate the coming fundamentals.