How rising geopolitical tensions & the unwinding yen carry trade are impacting UAE equities

Rate cut hopes boost bullish sentiment

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Published: Mon 19 Aug 2024, 8:33 PM

After the yen carry trade triggered a spike in the VIX index, global equities, including those in the UAE, rebounded significantly. This recovery came in line with the positive expectations of a 25 basis points rate cut by the Federal Reserve in September.

Recent US inflation data shows a slight uptick in the core Consumer Price Index (CPI) month-over-month from 0.1 per cent to 0.2 per cent, with the overall monthly CPI also increasing from -0.1 per cent to 0.2 per cent. This rise, driven by higher services inflation, suggests a 25-bps rate cut is more likely in September than a 50-bps cut. Meanwhile, the annual CPI decreased from 3 per cent to 2.9 per cent, revisiting 2021 levels. These developments have strengthened expectations for a rate cut by both the Fed and the Central Bank of the UAE (CBUAE).

The impact of the yen carry trade on global markets and the surge in the VIX index also caused the UAE MSCI Index to experience a sharp decline, nearing the lows of 2024. However, it rebounded strongly as the VIX and global markets recovered from their yearly extremes.

During the first half of 2024, the UAE MSCI Index leaders, particularly in the financial, real estate, consumer discretionary, and communication services sectors, reported record revenue levels. The financial and real estate sectors led this growth, reflecting strong demand and market share gains. The UAE saw its status as a premier destination for international businesses and entrepreneurs strengthened, with capital driving this positive performance and further revenue growth expected in the coming years as noted by leading industry chairmen.

Razan Hilal, market analyst at Forex.com

“Despite the challenges posed by the yen carry trade, which briefly pushed the UAE MSCI Index near its 2024 lows, the index rebounded sharply alongside global equities. The potential for a 25-bps rate cut in September by both the CBUAE and the Fed has increased bullish sentiment”, confirms Razan Hilal, Market Analyst, CMT at FOREX.com. She adds: “The risks associated with further unwinding of the carry trade along with rising geopolitical tensions increase risk aversion and make the market outlook cautious for the year-end.”

Markets have responded positively to easing inflation and stronger-than-expected economic data, with a notable rebound from August’s sell-off. The technology and growth sectors, which were hit hardest during the downturn, have led the recovery. As interest rate cuts approach and inflation continues to moderate, a broader market rally is anticipated. Investors may benefit from diversifying portfolios across growth and value stocks. Large-cap and mid-cap US equities, particularly in sectors like industrials and utilities, are promising.

Mohamed Hashad, chief market strategist, Noor Capital

“Historically, a combination of interest rate cuts and a resilient economy has proven favorable for markets. While short-term volatility is expected, especially during the seasonally weak September and October, long-term prospects remain optimistic. Overall, the current economic environment presents opportunities for investors to capitalize on market fluctuations and position portfolios for sustained growth,” Mohamed Hashad, chief market strategist, Noor Capital, said in a note.

Ole Hansen - Head of Commodities Strategy - Saxo Bank.

The market turnaround after better-than-expected US economic data reduced fears of a severe downturn in the world’s largest economy, thereby easing pressure on the Federal Open Market Committee (FOMC) to implement deep interest rate cuts. However, China, the world’s top consumer of commodities, remains weak due to a persistent property slump, rising unemployment, and weak consumption. “These developments should prompt caution regarding the commodities sector from a demand perspective. However, the supply side of key commodities might find support from geopolitical events, adverse weather, industrial action, and the weakest hedge fund positioning in more than a decade, which could spur fresh demand and technical-driven support,” Ole Hansen, Head of Commodities Strategy, Saxo Bank, said in a note.