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Abu Dhabi, UAESaturday 15 December 2018

Global stocks fall nearly 6% in worst trading week of two years on fears of higher interest rates

Fallout in the Middle East less pronounced as equity valuations weren't stretched

Global stocks fall more than 5 per cent last week. (AP Photo/Richard Drew)
Global stocks fall more than 5 per cent last week. (AP Photo/Richard Drew)

Global stocks plummeted nearly 6 per cent on aggregate last week as fears of a quicker pace of US Federal Reserve rate tightening was exacerbated by quant trading strategies and exchange traded funds that track the volatility index.

Stocks in the UAE were not as badly hit by the wave of panic selling because equity valuations were not as elevated as those in the developed world or other emerging markets with the Dubai Financial Market General Index dropping just 2.5 per cent last week. The MSCI All World Index, a gauge of developed world and emerging market stocks, fell 5.75 per cent last week.

"Any significant sell-off in risk assets in the US and rest of the world will no doubt have a negative impact on investor sentiment in the region, cause negative price moves in the short term and could result in some foreign outflows in case we see large redemptions from emerging market ETFs," said Sachin Mohindra, a portfolio manager at Invest AD, an Abu Dhabi–based asset managers.

"Valuations are not stretched at an absolute level and the underperformance relative to other major markets in 2017 has resulted in attractive relative valuations as well. Dividend yields across a number of regional stocks are attractive and should provide a floor to stock prices in the near term," said Mr Mohindra.

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Meanwhile, the MSCI Emerging Market, which has a heavy concentration of Chinese stocks, slipped 7.15 per cent. Commodities dropped, with the Brent crude falling 8.4 per cent to close the week at $62.79 a barrel, as the US dollar firmed 1.4 per cent against a basket of currencies. The drop in global equities was the worst weekly sell off in two years.

The turmoil in global markets was sparked by a strong US labour report on February 2 which investors took to mean that the US Federal Reserve might raise interest rates at a faster pace in 2018, bringing the longest era of cheap money in the country's history - that's helped prop up global asset prices - to a close.

While the S&P 500, the benchmark measure of US stocks, closed the week down 5.1 per cent, it did stage a late session rally on Friday that saw the index close 1.4 per cent higher.