DFM Rally Ends: Crude Logic

The Emirates Securities and Commodities Authority, the regulator of the Dubai Financial Market, has demanded a full explanation from Emaar Properties about the status of a reported agreement with Kingdom Holdings to build the world’s tallest tower in Jeddah.

The announcement appeared first in a press release from Kingdom Holdings that gave only sketchy details of the project, and then Emaar issued a statement denying that it would provide anything more than management services for the project and charge a fee.

Emaar’s fall

Emaar’s shares dropped 5.7 per cent yesterday, wiping out most of the 7.2 per cent rise the previous day, and helping to drag the DFM down 2.5 per cent.

With global stock markets also enduring their worst day for two-months yesterday, this could well mark the end of the DFM rally from the lows of the end of last year, and the start of a major summer decline.

Indeed, the Emaar announcement inquiry and even more positive news such as the ending of the customs dispute with Saudi Arabia, are likely to be overshadowed by events in global financial markets which appear to have taken a decisive turn for the worse.

Over the past three months global stock market investors have become persuaded that the worst of the recession was over, and that a relatively easy path to recovery lay ahead. That always looked wishful thinking in what has been widely classified as the worst recession since the Great Depression of the 1930s.

However, Gulf stock markets have been relative laggards in this stock market upturn. A far more convincing rally has been seen in the oil price which has more than doubled from its $33 a barrel low last December.

Crude logic

And of course the fate of the oil price is going to be far more crucial to gauging the recovery potential in the Gulf States than monitoring stock prices that reflect rather than anticipate crude oil prices.

If yesterday’s decline in the oil price is any guide then commodity prices could also be due for a rough summer. On the other hand, the way in which commodities led the recent market rebound will have been noted by investors, and this asset class is likely to be seen as the best investment for the next upturn.

That could keep oil prices higher than otherwise, and also set the stage for another DFM rally, perhaps after the summer and Ramadan.