Stocks fall as geopolitical uncertainty offsets staff-level agreement with IMF

The Pakistan Stock Exchange (PSX) experienced volatility during the final week as growing geopolitical concerns, high oil prices, and increasing bond yields overshadowed optimism stemming from Pakistan's Staff-Level Agreement (SLA) with the International Monetary Fund (IMF). The KSE-100 index concluded the week 0.6% lower, at 167,089 points, a decline of 1,066 points, as reported by Arif Habib Ltd. Market sentiment remained muted due to attacks on vital shipping routes, with the Houthis of Yemen extending their targets to include Saudi Arabia's civilian infrastructure and energy facilities.

Concerns about Ukrainian drone strikes on Russian refineries and potential US energy shortages further contributed to Brent crude prices staying above $100 a barrel, according to AKD Securities Ltd. The SLA, covering the fourth review of the Extended Fund Facility (EFF) and the third review of the Resilience and Sustainability Facility (RSF), offered some respite, paving the way for a $1.2 billion disbursement under the two programs, contingent upon IMF Executive Board approval.

The cumulative disbursements from these programs could total around $5.7 billion. However, worries over the widening trade deficit, inflation, and future interest rate trends continued to put pressure on investors. The government managed to raise Rs381 billion against a Rs350 billion target in its latest Pakistan Investment Bonds (PIBs) auction.

Yields on government bonds rose by 26-41 basis points for three-, five-, and 10-year tenors, whereas the two-year yield fell by 19 basis points. The yield hike raised expectations of a potential rate hike at the upcoming monetary policy meeting. Pakistan's foreign exchange reserves, held by the State Bank of Pakistan, saw an increase of $15 million to $21.5 billion as of October 2.

The Pakistani rupee edged up by 0.03% to settle at Rs277 against the US dollar. The government's debt stood at Rs82.95 trillion at the end of August, up 7.1% year-on-year but down 0.5% month-on-month. Banks were the primary negative factor, losing 566 points, followed by fertiliser producers with 234 points, automobile manufacturers with 97 points, cement companies with 75 points, and textile composite firms with 43 points.

Habib Bank, MCB Bank, and United Bank were the top negative contributors, accounting for 388 points of the total decline. Fatima Fertiliser and Fauji Fertiliser Company also negatively impacted the index. Oil marketing companies contributed positively by adding 110 points, while power companies added 36 points. Pakistan State Oil led individual positive contributions with 113 points, while Hub Power Company, Pakistan Oilfields, Engro Holdings, and Mari Energies also bolstered the market.

Trading activity weakened during the week, with average daily volume dropping 18.6% week-on-week to 427 million shares and the average traded value decreasing by 2% to $67 million. In the cement sector, despatches rose 6% year-on-year to 4.62 million tonnes in September, driven by a 7% increase in domestic sales and flat exports.

In the first quarter of FY27, despatches grew 4% to 13.14 million tonnes, with local sales up 8% despite an 11% decline in exports. The government's deposits increased by 14% year-on-year to Rs39.2 trillion at the end of August, according to AKD Securities. Cotton arrivals rose 5% to 3.2 million bales during September. Oil production fell 6.4% week-on-week to 63,700 barrels per day, while gas output decreased by 1.4% to 2,999 million cubic feet per day, mainly due to lower output from northern oilfields and the Mari, Sui, and Sharf fields.

Petrol prices increased by 2.1% to Rs398.96 per liter, while high-speed diesel prices fell by 0.9% to Rs395.72. Sindh Engro Coal Mining Company is expanding its Thar Block-II mine to supply more coal to Lucky Electric Power Company, potentially allowing a complete shift to local coal and decreasing reliance on imports. Analysts anticipate that quarterly earnings reports and geopolitical developments will influence market sentiment in the upcoming quarters.

The index traded at a 7.5x price-to-earnings ratio and had a dividend yield of 6.7%. Easing inflation, better economic indicators, and any de-escalation in the Middle East could help stabilize oil prices and support the case for monetary easing. However, ongoing geopolitical uncertainty may still hinder gains.