Falling bond yields could boost stocks

A decline in interest rates on long-term government bond has received less attention, but it could be a reason stocks find support during the upcoming week, dealers said on Saturday.

They added that long-term bond yield has dropped below the policy rate for the first time in eight years, signaling an end to Asia’s most aggressive tightening cycle.

Banks have been buyers of benchmark 10-year debt in recent weeks on expectation that borrowing costs have peaked and are set to cool from here on. The last time this pattern was seen, in 2011, interest rates dropped by 150 basis points over a few months.

After depicting a flattish trend, the Pakistan Stock Exchange benchmark KSE-100 index recorded a noteworthy gain of 3 percent or 963 points and crossed 33,000 points level. The average volume reached to one year high with weekly volume recorded a healthy increase of 106 percent as positive developments on economic front bolster overall sentiment.

Foreign selling continued during the week and clock-in at $4.7 million compared to a net sell of $8.8 million during last week. Selling was witnessed in commercial banks ($4.6 million) and food and personal care ($1.7 million). On the domestic front, major buying was reported by other organisations ($4.9 million) and individuals ($4.4 million). On the local investor’s front, companies and individuals bought shares worth $10.84 million.

The index started the week on a positive note amid first quarter of the current fiscal year tax collection being reported at 90 percent of the IMF target.

The recovery was noticeable owing to positive news on exit from FATF grey list; surge in cement dispatches and prices; business community meeting with army chief and government efforts to take macro-economic situation into consideration

An analyst at Habib Metro-Financial Services said the market to stay range bound in the near-term and on-going rally is not expected to stay much longer on the basis of mid-term earnings expectations. “However, we suggest investors to value-hunt in blue-chip scrips for the long-run.”

Major developments next week include Prime Minister Imran Khan’s visit to China aimed at reviving China Pakistan Economic Corridor (CEPC) projects and removing impediments. Clarity on lower inflation levels going forward has emerged making way for expectations of interest rate cut as soon as mid-November 2019 in the State Bank of Pakistan monetary policy committee announcement.

On the other hand, upcoming FATF review scheduled from October 10 to 14 may play a vital role in determining the trajectory of the market.

Sector-wise positive contributions came from commercial banks (231 points), cements (189 points), power generation & distribution (96 points), oil & gas marketing (93 points), and fertilizer (68 points). Scrip-wise positive contributions were led by HBL (103 points), HUBC (52 points), ENGRO (51 points), DGKC (50 points) and NBP (50 points).