Following the end of a horrible week for petroleum importers (not to mention shale producers) despite WTI briefly dipping under $40 (wasn't this supposed to be great news for the US economy?) we have the start of a just as ugly week for the Persian Gulf oil exporters, whose Sunday market open can be described as a continuation of last week's broad risk carnage, and where Saudi Arabia, until recently the region's best performing market, is now down 10% for the year and down 30% compared to 12 months ago.
Appropriately enough following our overnight article lamenting the death of the Petrodollar, the WSJ opens with a description of "stock markets in the petrodollar-dependent Persian Gulf tumbled Sunday to multi-month lows, spooked by sharply lower oil prices and a global equities selloff on growing concerns about China’s economy."
Saudi Arabia, the Middle East’s biggest market, led the regionwide decline to finish the day nearly 7% lower. Dubai stocks dropped by a similar percentage, while regional peers Abu Dhabi and Doha’s markets both fell 5% each to extend recent losses.
Dubai stocks lost 7% to end at 3451.48, while its neighbor in the United Arab Emirates, Abu Dhabi’s market, dropped 5% to 4286.49. Qatar’s main stocks benchmark finished down 5.3% at 10,750. The Gulf stock markets are open for trading Sunday through Thursday.
Investors took a lead from Saudi Arabia, the region’s biggest economy. Its stocks closed 6.9% lower at 7463.32 after Fitch Ratings on Friday downgraded its outlook for the kingdom to negative from stable because of weaker oil prices.
The Saudi economy is heavily dependent on oil, which accounts for 90% of fiscal revenues, 80% of current account revenues and 40% of the gross domestic product, analysts at Fitch noted.
By now, we have hammered the point that the price of oil impacts so much more than just the US "price at the pump" that even the most clueless hacks have admitted that plunging oil is not "unambiguously good" for the economy. In fact, it is downright bad for every economy whose confidence is reliant on asset prices, as the liquidation of oil forces the selling of other related assets to satisfy fiscal deficits and capital outflows (if anyone is still confused how this works, then read our article from last November which explained it all) in what a procyclical feedback loop, which was great when the cycle was on the way up and is anythig but now that the global commodity/asset/leverage cycle is finally deflating.
So what comes next? The margin calls, of course:
Not surprisingly, retail investors that still dominate most regional markets further cut their equity exposure, also in part because of margin calls as benchmarks fell below key support levels. Margin financing, or money borrowed for stock purchases, is often used by small investors in the region because of the relatively easy access to credit here.
“The multiple fears of China slowing down, a currency war, reduced oil-related income for regional governments to spend and a growing U.S. economy not being strong enough to withstand these new threats does not make for a pretty picture,” Al Masah Capital said
And just like in China and the US, investors need some reassurance, preferably from central banks and such, that the selling is now over.
“Regional buyers need a lot of conviction to step in front of this speeding train; however, valuations are becoming attractive, especially in Saudi and U.A.E., but these now need to be taken in context of a rapidly changing economic environment,” Al Masah added.
The WSJ concludes by noting that "several analysts agreed that the selling might be overdone, especially in some Gulf markets, but largely remain cautious." In other words, more cautiously optimistic "analysts" - just what CNBC needs ahead of its Sunday night Markets in Turmoil segment.
In the meantime we bring you... "Arab traders with hands on their heads (if not yet faces)"