Dubai's Economic Recovery Driven by Amlak Finance and DEWA; Abu Dhabi Registers Decrease

Dubai's Economic Recovery Driven by Amlak Finance and DEWA; Abu Dhabi Registers Decrease

In the world of global finance, the decisions made by the U.S. Federal Reserve have far-reaching implications, particularly for the Gulf region. This week, the Fed's monetary policy once again found itself under the spotlight, influencing the performance of various Gulf equities and currencies.

Abu Dhabi's index finished lower on Friday, reflecting the uncertainty and market volatility that has been a hallmark of the Fed's recent policy moves. The Fed, for its part, has maintained interest rates steady in the 4.25%–4.50% range after several rate hikes, with ongoing quantitative tightening via reduction of Treasury and mortgage-backed securities holdings.

The Fed's cautious stance, with some officials projecting possible rate cuts later in 2025 while others expect none, has created a sense of unease in the Gulf financial markets. Gulf stock markets are sensitive to U.S. rate changes because higher U.S. rates often lead to capital outflows from emerging and frontier markets, including Gulf countries, as investors seek higher returns in U.S. dollar assets.

This sensitivity was evident in the performance of various Gulf equities. Dubai Electricity And Water Authority experienced a 0.4% increase, while Emirates Telecommunication Group (E&) and Sharjah-based Dana Gas experienced a 2% decline and a 1.2% decline, respectively. The rebound of Dubai's main index was supported by a 5.3% surge in Amlak Finance and a 0.6% increase in Emirates Central Cooling Systems Corporation.

The impact of the Fed's decisions extends beyond equities to the Gulf currencies, most of which are pegged or tightly linked to the U.S. dollar. If the Fed cuts rates, it could weaken the U.S. dollar, leading to currency appreciation pressures in Gulf states which maintain dollar pegs. This could affect export competitiveness but also reduce inflation imported via the dollar. Conversely, if the Fed keeps rates high or tightens further, the dollar may strengthen, supporting Gulf currency pegs but potentially raising inflation and increasing the cost of hedging U.S. dollar-denominated debt.

The Fed's decisions regarding interest rates are influenced by the economic growth and inflation rates in the U.S. President Trump has criticized Fed Chair Jerome Powell for being "too late" in cutting interest rates, and his nomination of Stephen Miran to fill a vacant seat at the Fed for a few months reflects this sentiment. Stephen Miran shares similar views with President Trump regarding the Fed's interest rate decisions.

However, it's important to note that the White House is seeking a permanent addition to the central bank's governing board and a new chair. The repercussions of these decisions will continue to ripple through the Gulf financial markets, shaping the trajectory of equities and currencies in the region.

In other news, Dubai Electricity And Water Authority's second-quarter net profit jumped more than 25% to 2.26 billion dirhams ($615.3 million), while Dana Gas reported a 12% decrease in its second-quarter net profit to AED 112 million ($30.5 million). Both Lulu Retail Holdings and Alpha Data, which are set to release earnings next week, saw a 0.8% and a 1.7% increase, respectively.

Oil remained stable at 0.69% to $66.89 a barrel, providing some respite amidst the turbulence in the financial markets. As the Fed continues to navigate the complexities of its monetary policy, the Gulf financial markets will remain a keenly watched arena, offering insights into the global economic landscape.

1. The uncertain stance of the Fed, with some officials potentially projecting rate cuts in 2025 and others expecting none, has created a sense of unease in the Gulf financial markets.
2. Higher U.S. interest rates often lead to capital outflows from emerging and frontier markets, including Gulf countries, as investors seek higher returns in U.S. dollar assets.
3. The decisions of the Fed regarding interest rates are influenced by the economic growth and inflation rates in the U.S., making it a critical factor for the performance of Gulf equities and currencies.
4. If the Fed cuts rates, it could weaken the U.S. dollar, leading to currency appreciation pressures in Gulf states which maintain dollar pegs, potentially affecting export competitiveness but also reducing inflation imported via the dollar.
5. The repercussions of the Fed's decisions regarding its monetary policy will continue to ripple through the Gulf financial markets, shaping the trajectory of equities and currencies in the region.

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