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Dying Petrodollar Ripples Through Markets As Asset Managers Bemoan Loss Of Saudi Bid

Tyler Durden's picture




 

One of the key things to understand about China’s liquidation of hundreds of billions in US paper is that far from being a country-specific phenomenon, it actually marks the continuation of something that’s been taking place in other emerging markets for some time. 

As we outlined in “Why It Really All Comes Down To The Death Of The Petrodollar,” the forced sale of Beijing’s UST reserves is simply the most dramatic example of what Deutsche Bank has called “quantitative tightening.” For years, reserve managers in the world’s emerging economies worked to accumulate war chests of USD-denominated paper in an effort to ensure that in a crisis, they would have sufficient firepower to guard against speculative attacks on their currencies and/or accelerating capital outflows. Slumping commodity prices and the threat of a supposedly imminent Fed hike have conspired to put pressure on these reserves and outside of China, nowhere is this dynamic more apparent than in Saudi Arabia. Indeed it was the Saudis who dealt the deathblow to the great EM reserve accumulation.

By intentionally killing the petrodollar, Riyadh effectively ensured that the pressure on commodity currencies would continue unabated, but as we’ve documented exhaustively, that was and still is considered an acceptable outcome if it means bankrupting the US shale complex and securing market share. But for Saudi Arabia, this is all complicated by three things: 1) the necessity of preserving the lifestyle of everyday citizens, 2) spending associated with the proxy war in Yemen, and 3) defense of the riyal’s dollar peg. All of those factors have served to weigh heavily on the county’s already depleted petrodollar reserves, and if the “lower for longer” crude thesis plays out, Riyadh may see further pressure on its current and fiscal accounts which are now both squarely in the red. 

Of course all of the above is a drag on global liquidity and as we warned nearly a year ago, the death of the petrodollar means oil exporters are set to become net sellers of assets for the first time in decades.

As FT reports, markets are beginning to feel the effects. Here’s more:

Saudi Arabia has withdrawn tens of billions of dollars from global asset managers as the oil-rich kingdom seeks to cut its widening deficit and reduce exposure to volatile equities markets amid the sustained slump in oil prices.

 

The Saudi Arabian Monetary Agency’s foreign reserves have slumped by nearly $73bn since oil prices started to decline last year as the kingdom keeps spending to sustain the economy and fund its military campaign in Yemen.

 

The central bank is also turning to domestic banks to finance a bond programme to offset the rapid decline in reserves.

 

This month, several managers were hit by a new wave of redemptions, which came on top of an initial round of withdrawals this year, people aware of the matter said.

 

“It was our Black Monday,” said one fund manager, referring to the large number of assets withdrawn by Saudi Arabia last week.

 

Institutions benefited from years of rising assets under management from oil-rich Gulf states, but are now feeling the pinch after oil prices collapsed last year.

 

Nigel Sillitoe, chief executive of financial services market intelligence company Insight Discovery, said fund managers estimate that Sama has pulled out $50bn-$70bn over the past six months.

 

“The big question is when will they come back, because managers have been really quite reliant on Sama for business in recent years,” he said.

 

BlackRock, which bankers describe as the manager handling the largest amount of Gulf funds, has already reported net outflows from Europe, the Middle East and Africa.

 

Its second-quarter financial results reported a net outflow of $24.1bn from Emea, as opposed to an inflow of $17.7bn in the first quarter.

 

Market participants say the outflow is in part explained by redemptions from Saudi Arabia and other Gulf sovereign funds, such as Abu Dhabi.

Of course, as indicated above, this isn't an isolated incident (i.e. it's not confined to the Gulf states and China). The worse things get for EM, the more likely it is that countries will continue to draw down their reserves and indeed, if the situation continues to deteriorate in Brazil, it looks increasingly likely that Copom will become a seller as well. 

Make no mistake, this is now a key factor in the FOMC's decision making process, as EM reserve levels essentially serve as a proxy for trends in global liquidity and thus are one way of measuring the degree to which market conditions are poised to amplify a potential rate hike. We close with the following quote from Goldman, commenting on the above earlier this year:

We estimate that the new (lower) oil price equilibrium will reduce the supply of petrodollars by up to US$24 bn per month in the coming years, corresponding to around US$860 bn over the next three years. The ultimate impact, however, will depend on a number of key current account buffers (goods imports, net factor income and service imports). 

 

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Mon, 09/28/2015 - 08:18 | 6601264 junction
junction's picture

The Saudi solution to everything: Off with your heads!

Mon, 09/28/2015 - 08:20 | 6601267 VinceFostersGhost
VinceFostersGhost's picture

 

 

They might be terrorists.....where are the carriers?

Mon, 09/28/2015 - 08:37 | 6601302 LawsofPhysics
LawsofPhysics's picture

Perhaps, but if the 2008/2009 "crisis" was handled like that, we would be in a real recovery by now.

get long sharecropping and guillotines, beat the rush.

Mon, 09/28/2015 - 08:21 | 6601269 buzzsaw99
buzzsaw99's picture

i am reminded of the chorus from that old hymn:

the fed is bigger than the world's problems, bigger than all their fears;

the fed is bigger than any selloff that I can or can not see.

Oh, yes, Yellen's bigger than all my questions, bigger than anything;

the fed is bigger than any mountain that I can or can not see.

Mon, 09/28/2015 - 08:21 | 6601270 Doppelganger71
Doppelganger71's picture

For those who like to post "tick-tock, bitches" in their commentary, methinks the tickin' and tockin' are done, and it's time for the bell to ring..........

Mon, 09/28/2015 - 08:21 | 6601272 JamaicaJim
JamaicaJim's picture

motor oil is motor oil......

Mon, 09/28/2015 - 08:35 | 6601281 Latitude25
Latitude25's picture

Meanwhile dollar strength.  Looks like that kook Jim Willie was right.  The dollar will rise and rise until it just disappears.  I'm finally starting to get a clearer picture of how that will happen.

Mon, 09/28/2015 - 09:33 | 6601462 SilverDOG
SilverDOG's picture

 

 

 

Let us see the strength compensate for income reduction of the majority.

 

YEAH RIGHT ! 

Mon, 09/28/2015 - 18:58 | 6604286 daveO
daveO's picture

To coincide with China given a piece of the reserve currency pie.

Mon, 09/28/2015 - 08:47 | 6601331 all-priced-in
all-priced-in's picture

Every major move has winners and losers - every trade had a winner and a loser

 

This is all about the losers - how can everyone lose?

 

Who are the winners?

 

How can any of the countries that are  liquidating their USD reserves be considered winners?

 

 

 

 

 

 

 

 

 

Mon, 09/28/2015 - 09:20 | 6601419 KansasCrude
KansasCrude's picture

Simply because they are doing it now while the USD is still massively overvalued.  When the Weimar days arrive they will be glad they did it now.  But you are right in that no one likes to eat up there reserves.  Especially with the handwriting on the wall of world economies

Mon, 09/28/2015 - 10:26 | 6601658 Flakmeister
Flakmeister's picture

You are projecting...

Mon, 09/28/2015 - 09:21 | 6601420 KansasCrude
KansasCrude's picture

Dupe

Mon, 09/28/2015 - 09:10 | 6601384 MilwaukeeMark
MilwaukeeMark's picture

is it just me or does any one else sense the government is going to be hawking MYRAs real soon?
You can't park a steaming cheeseburger in front of a starving man long before he can't resist the temptation and grabs for it.

Mon, 09/28/2015 - 09:24 | 6601428 Kermit d frog
Kermit d frog's picture

With China and Russia taking over the middle east as a stable force for good, our presence is unwelcome, if China wants to destroy us they have not got to fire a bullet, just dump T-bonds and watch us eat ourselves from the inside out. Rome is burning and the old empire is weak. 

 

Mon, 09/28/2015 - 09:27 | 6601438 Jtrillian
Jtrillian's picture

Do a search on the "28 pages" and you will know Saudi Arabia is our enemy.  The truth will out. 

They were an ally of convenience.  That convenience was cheap oil and yet another puppet dictatorship who agreed to do the will of the US in the middle east.  Not sure how much longer this alliance will hold as things are a mess in the region. 

Mon, 09/28/2015 - 10:49 | 6601759 Baron von Bud
Baron von Bud's picture

The Saudis supplied the patsies for 911 but the actual destruction was done by neocons right here at home. Building 7 is the smoking gun. Not hit by a plane and a demolition collapse. If the Saudis didn't place the explosives in a building loaded with US government agency offices then who did? Ever since the 2001 market crash its been nothing but financial bubbles and war. All signs of a failing nation and the DC crowd knows it. Patriot Act, Facta, NSA, endless war. Do any of the presidential candidates even mention reform or bringing jobs back home. Zero. That's because it's all over.

 

 

Mon, 09/28/2015 - 11:16 | 6601867 RexZeedog
RexZeedog's picture

Do you know how stupid your comment is? Have you even bothered to look at the actual proof? Imbeciles like you give stupidity a bad name.

Mon, 09/28/2015 - 12:49 | 6602314 Lucky Leprachaun
Lucky Leprachaun's picture

It's you who's the imbecile or more likely a troll.  The official 9/11 explanation is simply laughable.

Mon, 09/28/2015 - 19:04 | 6604315 daveO
daveO's picture

Rebekah Roth book, Israeli art students.

Mon, 09/28/2015 - 09:42 | 6601477 marmotmanor
marmotmanor's picture

Or maybe, they achieve multiple outcomes from this.

Saudis swapped oil for Gold and US$ for immediate expenditure since the petrodollar was formed. It is highly likely that the Saudi's hold up to 20,000 tons of gold.

Forget the rubbish figure from the world gold council of 323 tons. Saudis implicitly understand money.

They always knew that at some time in the future the USpetrodollar$ would come to an end and with it the suppression of the gold market.

During the petrodollar reign Saudi's swapped cheap oil for cheap gold, always knowing that in the end the US would lose reserve currency status, the shackles would come off gold and it would reset after 25 years of suppression.

So the Saudi's provided cheap oil for the US market, and in return the US suppressed the gold price. But now the game is up.

Suddenly Saudi's have enough gold for a thousand years. US Treasuries - bits of worthless paper from a bankrupt government.

Mon, 09/28/2015 - 19:07 | 6604329 daveO
daveO's picture

I think I read something about some of their gold be stolen from western banks. If they have that much within their country, they will be invaded eventually.

Mon, 09/28/2015 - 10:39 | 6601710 Angry Plant
Angry Plant's picture

Between one and two trillion dollars of revenue has been lost in the commodity industry to the recent decline in oil and other commodities.

Much of this loss in revenues is impacting emerging markets that have non diversified ecconomies based upon commodity exports. Roughly one fourth of the global economy is absorbing most of this trillion plus dollar hit.

Most of those emerging market ecconomies borrowed heavly based upon being able to pay the money back with commodity exports valued at pre oil crash rate. This debt fueled growth in emerging markets was one of the primary drivers of global economic growth in recent years. Now that has reversed and is drving world growth rate down instead of up.

I have no good news to add here just a statement of what is happening.

Most history books would desribe events like I desribe above as ending in the words global economic depresion. 

Tue, 09/29/2015 - 05:06 | 6605613 Brutlstrudl
Brutlstrudl's picture

The Gold window was closed  by the time the Petro dollar was invented. The Saudi's took it because we were the only game in town economically and could provid security militarily for the house of Saud. Not saying they don't have any gold, just that the US was too big a market to let it go down the tubes.  

 

 

 

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