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Exploring similarities between Pakistan and US equity markets

Pakistan Stock Exchange closed in red for the seventh consecutive month and lost 6.8% during August 2019, which was also a worst monthly decline in this year. Market remained highly volatile due to various reasons that included: 1) spike in Pakistan-India tensions at Line of Control after India revoked article 370, defining the disputed state of Kashmir, 2) uncertainty in global markets due to Sino-United States trade war and 3) volatility in global oil prices.

The outgoing month also witnessed many surprises in financial results of the companies. HASCOL posted loss of Rs56.09/share for the half year ended 30th June 2019, as a result its shares price consistently declined. During the month, Exploration & Production companies cumulatively witnessed highest erosion in value, followed by Commercial Banks. Based on NCCPL data, foreigners remained net sellers amounting to US$3.52 million, while on the local front, Mutual Funds remained net seller to the tune of US$34.21 million.

Corporate announcements and news flow impacting the market included: 1) National Foods (NATF) announced the financial result for FY19 reporting EPS of Rs 10.42 as compared to an EPS of RS8.12 for same period last year. Earnings were up by 28% owing to higher revenue, up by 12%YoY.

The General Tyre & Rubber Company (GTYR) announcing financial results for FY19, recording an EPS of Rs 1.21. Earnings were down by 82%YoY due to depletion in gross profit margin.

Asian Development Bank (ADB) indicating disbursement of US$7.5 billion assistance to Pakistan over the next three years (2020-24) under its next Country Assistance Strategy.

Petroleum Division receiving recommendation for the reduction in POL rates. According to details, per liter price of High Speed Diesel will presumably be lowered by Rs7.67, Light Diesel by Rs5.63, Motor Gasoline by Rs4.59 and kerosene oil by Rs4.27.

The State Bank of Pakistan on Thursday injected Rs 467 billion into money market for one night (overnight) as reverse repo purchase through its open market operation. Eight bids of Rs 467 billion were offered and all were accepted. The rate of return accepted is 13.4 %per annum.

Global Markets

The major indices posted their worst monthly performance in August since May this year. The Dow fell 1.7% in August while the S&P 500 lost 1.8%. The Nasdaq pulled back 2.6%. Sino-US trade relations intensified this month, rattling investors’ confidence. Investors took refuge in traditionally safer assets such as gold and silver, the SPDR Gold Trust (GLD) rose 8% in August.

Last week, China retaliated against US tariffs by unveiling levies of its own that target US$75 billion in US products. President Donald Trump then said the US would hike tariffs on a slew of Chinese products.

Global markets remained on red alert over a trade war between the two superpowers China and the US could shatter global economic growth, and hurt demand for commodities like oil.

The US and China have been engaged in a trade war since last year, with both countries slapping tariffs on billions of dollars worth of their products. This has led to worries over corporate profit growth and fears of a broader economic slowdown.

 

Tensions between two countries eased slightly this week. This propelled the S&P 500 up nearly 3% week to date, its best weekly performance since June. The broad index also snapped a four-week losing streak.

China’s Foreign Ministry said on Friday that the US and Chinese negotiators were maintaining effective communication as the two countries try to strike a trade deal. The report follows comments from the Chinese Ministry of Commerce on Thursday that hinted China will not escalate the trade war. Trump also said that some trade discussions had taken place on Thursday, with more scheduled over the coming weeks.

Investor sentiment was also dented this month as economic data pointed to a global slowdown, ramping up concerns of a possible recession.

The 10-year Treasury note yield fell below the 2-year rate this month. This is known as a yield-curve inversion and experts fear it because it has historically preceded recessionary periods in the US.

Still, recent US economic data has been strong. US consumer spending rose 0.6% in July, the Commerce Department said Friday. Meanwhile, consumer confidence remains near its highest level in nearly 20 years.

Stock investors may be happy to kiss August goodbye, but September might not be any better unless there are positive developments in Sino-US trade war. Markets are heading into September with hopes for an interest rate cut by the US Federal Reserve and fears that a slowdown in the global economy will reach the US.

Samuel Stovall, chief investment strategist at CFRA said, “If you thought August was bad, September can be worse. Not only is it the month with the largest average declines, but is the only month when the market falls more frequently than it rises. If history repeats itself we could see a sell-off in September and then we have some sort of capitulation.”

Investors will be looking for any news on whether face-to-face negotiations between the US and Chinese officials will move forward in September, as expected after the last round of talks. Wall Street also will be eyeing some important economic reports next week including August employment, the ISM manufacturing survey and the auto industry’s monthly vehicle sales. Next week could also bring clues on future monetary policy with Federal Reserve Chairman Jerome Powell set to speak next Friday, and Fed Governor Michelle Bowman scheduled to speak Wednesday.

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