Saudi index has lost all the gains for this year and oil could see a big move here
The Saudi stock market is currently in turmoil, which is leading Investors to lose their confidence by pulling money out of the country. The disappearance of journalist Jamal Khashoggi has raised Saudi Arabia under the spotlight and proved to be a major market event. President Trump has vowed “severe punishment” if the journalist was killed.
Initially, Saudia Arabian King Mohammed bin Salman has denied any knowledge about this death. However, following the most recent development, Saudi Arabia is expected to issue a report on Khashoggi and acknowledge the death of the journalist was due to an interrogation that went wrong. The purpose was just to abduct him, but the operation was not cleared by the authorities and individuals will now be held accountable. Yesterday, President Trump also suggested that rogue action may have taken place.
It is unsure how many believe such a statement, but the question is how Donald Trump will proceed after this. The reason he is involved is because of his close relations to Saudi and his recent visit to the country which showed the world their strong ties. All this is thanks to his son in law, Jared Kushner, the White House adviser who masterminded the entire new relation with Saudi Arabia after Obama administration clearly made their distance.
Mohammad Bin Salman appears to be one of the most proactive people the kingdom has ever had. Nobody has ever tried to convince several business leaders that they should use Saudi Arabia as the platform for their research labs the way he did. During his recent visit to the U.S., he met with Silicon Valley leaders and top executives. This kind of move is unprecedented and clearly shows that he is eager to diversify the country’s economy. In other words, he could be after creating another Silicon Valley in Saudi Arabia.
After holding a successful Economic Reform Event in 2017, the King decided to create the “Davos in the Desert” but it failed. Major media outlets and business executives have decided not to participate. JP Morgan CEO and Ford’s Chairman are just a few top executives in that category. If you want to attract Foreign Direct Investment FDI, businesses need assurance that they have the freedom to conduct their business, news wires have the freedom to report the actual picture and the political situation is stable enough. Saudi Arabia tied itself in unnecessary wars with neighbouring countries. Despite all these, businesses were still likely to consider the country as an option, but after Trump’s “severe punishment” remark, things have changed.
Whether Trump really adopts a tough stance against Saudi Arabia, remains to be seen. In the meantime, the Saudi stock index plunged nearly 7% during the session on Sunday after Trump’s initial comments and bounced back up yesterday after his softer tone. The index is up nearly 1.53% year to date, but these gains are under threat again as the sell-off is picking up steam. Trump has left it open whether his administration will be part of the investment summit in Saudi Arabia. If the situation between Saudi Arabia and the U.S. becomes intense, one thing that will be at threat is the peg between the Saudi Riyal and the dollar. We have seen this peg coming under serious pressure when the price of oil dropped at the lower 20s
Saudi is in a much stronger place compared to other countries the U.S. tried to put pressure on in the past. This is mainly because Saudi Arabia controls the OPEC cartel and it plays an important role here. It has the ability to put the supply and demand equation completely out of whack and trigger something similar to the Oil Embargo back in 1973.
Having said this, the United States have made several changes over the years and it is the work of the precious presidents which brought the U.S shale oil production to a level not seen before. But this doesn’t mean that the US and other OPEC countries can fill the gap. In other words, if the U.S. plays the same game it did with Iran, it is hard to imagine other countries stop buying Saudi oil.
Remember, if the U.S. bans other countries from buying Saudi oil, this could trigger a huge rally in the cryptocurrency market. It has been brought up several times before that countries could dump the dollar as the benchmark currency to trade oil and instead use Bitcoin. Despite the massive scalability issues, there is a strong possibility that Saudis may join forces with other countries that are facing similar obstacles. Hence, the entire thing could backfire for the Trump administration.
But Trump has made one thing clear from day one. He is more focused on his personal interests than anything else. He remarks that it will be foolish to cancel the arms deal with Saudi Arabia, as Saudi Arabia was a clear evidence of this.
Trump is an unpredictable individual, capable of picking fights with anyone without thinking about potential consequences for the country. It is this element that makes investors highly sensitive. Saudi Arabia is the single biggest outside investor in SoftBank Group Corp. The group’ stock price sunk the most in more than two years on Monday on the back of the disappearance of journalist Jamal Khashoggi. When a stock falls like this, one way to measure the risk is to look at the cost of their Credit Default Swap. The cost of this “against no-payment” has surged for SoftBank Group Corp and the chart below shows the CDS has jumped considerably, crossing the critical level of 10.
