"Speculators (like hunters) sense wounded prey, and already bets are being laid on a riyal devaluation. Although it is possible Saudi Arabia can afford to maintain its oil regime and U.S. dollar peg, this will come will escalating costs, financial and political, and one suspects the Saudi citizenry is not big on sacrifices."
What will bring down the Chinese and Saudi pegs, along with a long list of other pegs, is, how appropriately, the very same markets they’ve been relying on to NOT function. The bets against Hong Kong’s ability to maintain its USD peg have already started, and China is next, along with the House of Saud (the latter two just take more fire-power). Which of course is exactly why they speak their soothing ‘confident’ words. Words that are today interpreted as the very sign of weakness they’re meant to circumvent.
If you were wondering how much US debt Saudi Arabia holds, you're out of luck because as it turns out, that's a state secret protected by a decades old "unusual Treasury blackout." “It’s mind-boggling they haven’t undone it. The Treasury didn’t want to offend OPEC [but] it’s hard to justify this special treatment at this point.”
One thing policy makers should have learned after watching Greece unravel last summer is that capital controls almost always backfire. Once the market (not to mention the populace) senses panic, it's all downhill from there and make no mistake, there's blood in the water here.
"The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros. The sooner the better."
European shares tumbled, wiping out gains from a two-day rally, Asian stocks slid and the cost of insuring corporate debt rose as investor concern over global growth prospects resurfaced. U.S. equity-index futures pared gains of as much as 0.9 percent. Government bonds rose, with yields falling to records in Japan and China amid anxiety over the world economy. U.S. crude prices stabilized after dropping below $30 a barrel on Tuesday to touch the lowest since 2003 as Iran moved closer to boosting exports.
On the heels of a tumultuous weekend that saw Saudi Arabia cut diplomatic ties with Iran after the Saudi embassy was torched by protesters angry at the execution of a prominent Shiite cleric, CDS spreads for the kingdom have blown out to six-year wides while the implied odds of the riyal peg finally breaking are hitting new record highs.
Important pillars of the bull case evaporated throughout 2015. Global price pressures weakened, the global Credit backdrop deteriorated and the global economy decelerated. The huge bets on central bank policies left markets at high risk for abrupt reversals and trade unwinds – 2015 The Year of the Erratic Crowded Trade. Indeed, a global bear market commenced yet most remain bullish. Serious and objective analysts would view this ominously.
Oil's hope for a bottom anytime soon appears to stand Snow White's chance in hell of coming true. Seventy-eight years after Walt Disney released the first full-length animated feature, and seven factors in today’s crude complex are dwarfing crude prices.
Seven years of zero rates, massive monetary inflation and incessant market backstopping have desensitized and anesthetized. Rational thought ultimately succumbed to "perpetual money machine" quackery. And now all of this greatly increases vulnerability to destabilizing market dislocations, as senses are restored and nerves awakened. "A lot of this looks like late 2007 or early 2008," warns one manager, but today, market mispricing is systemic and global – virtually all securities classes at home and abroad.
"While funding continued to be available, such a large negative basis indicates potential market dislocations. And this may call into question how smoothly US dollar funding conditions will adjust in the event of an increase in US onshore interest rates. Similar pricing anomalies have also emerged in interest rate swap markets recently, raising related concerns."
As we noted recently, BofAML fears "a depeg of the Saudi riyal is the number one black-swan event for the global oil market in 2016," adding that it is "a highly unlikely but highly impactful risk." Given the recent action in Saudi Riyal forwards - the market's best guess at where the oil-ruch nation's currency will trade in the future - the chance of the black swan 'de-peg' is its highest since 2002. Besides this morning's "whatever it takes" moment, which oil markets quickly shrugged off, amid heavy subsidies to keep the people calm and the costs of wars in Yemen (and more in Syria), weak oil revenues leave The Sauds with few options (outside of the load the nation with ever more debt program): It's either stop it with the whole flooding an oversupplied market strategy, or let the peg fall before reserves runs dry.
"Can the government maintain this strategy of flooding the oil market? In our view, it is unlikely that Saudi leaders would want to exacerbate its ongoing reserve drain by pushing prices below $40/bbl. After all, pressure will quickly build on the riyal’s 30 year peg to the USD if Brent crude oil prices keep falling."
- Top Trade #1: Long USD vs short EUR and JPY
- Top Trade #2: Long US 10-year ‘Breakeven’ Inflation
- Top Trade #3: Long MXN and RUB versus short ZAR and CLP.
- Top Trade #4: Long EM ‘External Demand’ vs. Banks stocks
- Top Trade #5: Tighter Spread between Italy and Germany Long Rates
- Top Trade #6: Long large-cap US Banks relative to the overall S&P500
Global policymakers have gone to incredible measures to stabilize market, financial and economic backdrops. Yet reflationary measures will continue to only further destabilize. When policy-induced “risk on” is overpowering global securities markets, fragilities remain well concealed. Fragilities, however, swiftly manifest with the reappearance of “risk off.” Rather quickly securities markets demonstrate their proclivity for illiquidity and so-called “flash crashes.” So after an unsettled week in global markets, the critical issue is whether “risk on” is giving way to “risk off” dynamics.