Gulf equities rally on US Fed decision to hold off on interest rate increase

The Dubai stock mark index had lost as much as 26.7 per cent this month, erasing all its gains for the year.

Arabian Gulf equities from Dubai to Riyadh rallied yesterday after the US Federal Reserve hinted it would be patient in the timing of hiking interest rates, partially erasing heavy losses in the past two weeks on lower oil prices.

Investor sentiment made a drastic turn-around across oil-producing states after Saudi Arabia on Wednesday announced “massive” development projects, signalling that GCC countries would continue to spend in 2015.

Dubai's equity benchmark rose the most on record, closing 12.9 per cent higher at 3,426.70. It rose as much as 13 per cent during the trading session as investors bought shares in Emaar, Arabtec, Dubai Islamic Bank and Union Properties.

“I haven’t seen the index up 13 per cent in these markets,” said the NBAD Securities managing director Mohammed Ali Yasin, a veteran stockbroker from the days when shares were traded over the counter before the creation of the stock market in 2000.

“It was a shock, especially the speed at which it rose. But the big worry during the session was whether this rally was going to sustain itself. By the end of the day, it was apparent that all types of investors were buyers in the market,” Mr Yasin said.

The US central bank wrapped up a policy meeting on Wednesday, saying it would take a “patient” approach in deciding when to bump borrowing costs higher, Reuters reported. Policy, the Fed said, was consistent with its prior statement that it would only begin raising rates “a considerable time” after its massive stimulus programme ended in October.

The news sent US shares surging on Wednesday. The Dow rose 1.6 per cent, the S&P 500 soared 2 per cent and the Nasdaq jumped 2.1 per cent.

Abu Dhabi's index yesterday jumped 6.7 per cent to 4,365.19 points, while Saudi Arabia's Tadawul All-Share Index advanced 8.9 per cent to 8,320.55. Oman added 3.6 per cent to 5,684.68.

Dubai’s index had lost as much as 26.7 per cent this month as crude dropped to under $60 a barrel, triggering concern that lower oil prices would dampen growth.

The stock market declines triggered margin calls, in which highly leveraged investors could not cover the gap between the value of the shares and the amount of margin they have taken. One Dubai bank forced an Abu Dhabi investor to sell Dh400 million worth of shares on margin to cover their position, Al Ittihad newspaper reported this week.

The Securities and Commodities Authority, the UAE stock market regulator, on Wednesday backed stockbrokers' right to liquidate client portfolios in cases where the customer cannot cover their margin account. Brokers said, however, that it was not the brokerage companies but the banks that were forcing liquidations.

“The selling pressure of the market because of margin finished or weakened sufficiently, really turning sentiment around,” Mr Yasin said. “You can see that because otherwise people would have waited on the sidelines or we would have seen some profit-taking.”

The fact that the buying occurred across all stocks signals a general improvement in sentiment as well, Mr Yasin said.

Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai, on Wednesday met the Central Bank governor and minister of finance, AlBayan newspaper reported yesterday.

Investors should make decisions based on reason and not emotion, Sultan Al Mansouri, the Minister of Economy who is also head the SCA, said on Tuesday.

The statements “gave the confidence to the market that officials won’t sit by the side while this is happening, that they are still positive on growth of the economy,” Mr Yasin said. “It was important to give that kind of credibility.”

Furthermore, financial institutions were said to be shorting the market. Short selling is the practice of selling borrowed shares in the hope of buying them back later at a lower price, returning them to the original owner and keeping the difference.

Short selling currently only happens in the over the counter, or grey market. The SCA introduced regulations to govern the practice in 2012, but implementation has not yet begun.

Financial institutions yesterday began to cover those “shorts” [short covering is the practice of buying back borrowed securities to close an open position], according to Mr Yasin. “So we had long buys and covered shorts” providing upward momentum on the markets, he said.

Fund managers have called on the regulator, even as far back as before the 2008 financial crisis, to introduce short selling on stock exchanges, which will allow them to hedge and make money both on the upside and downside.

“There’s nothing wrong with it if it happens on the exchange, when its transparent and regulated by SCA,” said Mr Yasin. “But when it happens behind the scenes and its allowed for some but not for all is when it gets tricky. We need more tools to protect investors on the downside, a day like today shows the benefit of short selling.”

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