Bloody Tuesday: GCC, European Stocks Battered; Greek Stocks Collapse 13%!

Add to the carnage in China’s stock markets, it has been a largely bloody Tuesday for global risk assets.

The 4% crash in Europe’s crude oil, the Brent (as of Monday December 8), sent stock markets of major oil producers the Gulf Cooperation Council (GCC) plunging, again

table from ASMA

US oil WTIC rallied mildly today.

Risk OFF Tuesday hit European stocks pretty hard (from Bloomberg)

Since October, crashes have become real time. Greece’s financial markets cratered!

The Athens General index lost 12.78% in a single day (stockcharts.com) 

Today’s meltdown signifies the single biggest crash since 1987. Notes the Zero Hedge: (bold original)

Greek stocks are now down 13% - the biggest single-day drop since (drum roll please) the crash of 1987... led by total carnage in Greek banks (down 15-25% on the day). Greek bond yields exploded, 3YR +183bps to a new post-bailout high at 8.32% (and inverted to 10Y).

Greek bond yields also soared.

The Greek president called for a snap election on December 17 which reportedly may spark “political turmoil”.

The anti-bailout leftist group the Syriza which has been said to “promise everything to everyone” by reneging on deals for bailout, halting austerity, restoring social spending, continue to receive subsidies from the Eurozone, IMF and labor protection reportedly leads in the opinion polls. In short, the popular leftist group wants a bankrupt nation to revive free lunch policies and expect to get a free pass on the economy. So market’s response has been rational.

Interesting to see how a revival of the Greek crisis will impact a vulnerable Europe, in the face of a Japanese recession, a highly fragile Chinese economy and a slowdown in Emerging markets, aside from heightened geopolitical tensions.

Nonetheless US markets bounced backed from the depths of the selling pressure from a recovering USD-yen, buoyant small cap and technology stocks.

Wow. Saudi, UAE, Kuwait, GCC Stocks Just Crashed! Malaysian Financial Markets Under Pressure

Since October, I have been saying here that market crashes have become a real time event.

Last Friday, I pointed that oil prices just melted down. And because the oil crash came during closed markets of oil producing nations, the belated response of the latter has equally been horrific.

Anyway last night’s GCC’s stock market crash compounds on the earlier weakness, which I described last night:

Friday, as OPEC the deadlock persisted, oil prices crashed! West Texas Crude collapsed 10.18% and Europe’s Brent dived 9.77%! Friday’s meltdown compounded on the losses of oil prices for the week, specifically at 13.98% and 12.95% respectively!

Oil producing Norway’s all share index missed the region’s risk ON boat and instead got walloped by 7.13% this week.

GCC states, whose markets were closed during oil collapse, have already been drubbed due to prior oil price weakness. For the week, Saudi’s Tadawul plummeted 3.75%, UAE’s DFM sank 1.5%, Qatar’s Qatar Exchange plunged 3.72%, and Oman’s Muscat fell 2%.

Now the GCC equity market crash...

Kuwait Stock Exchange –3.35% last night, down –18.65% from peak 

Saudi Arabia’s Tadawul –4.76% last night, now in a bear market –22.5% from the peak. 

It’s interesting to see how fast this has happened. The Tadawul raced to record highs last July only to give back almost all gains up this year in barely 4 months. Easy up, fast down.

UAE’s Dubai Financial –4.74%; estimated loss of 19+% from peak—now at the portal of a bear market.

Oman’s Muscat  -6.21%; estimated peak to current loss at 13.8%. Again easy up, fast down

QATAR QE –4.28% estimated p-t-t loss of 11.8%. Bearish head and shoulder formation.

Bahrain BSE seems to have escaped the carnage.

Well selling pressures seems to have landed in ASEAN markets.

The USD-Malaysian ringgit has been pummeled (down 1.53%) as of this writing. Now at 5 year highs (or ringgit at 5 year lows)

Chart from google finance. Malaysia’s KLSE seems feeling the heat too and has been down –1.98% also as of this writing.

Malaysia’s 10 year yield just soared!

Interestingly Malaysia’s commodity exports (mining and agriculture) accounts for only 22.9% of total exports. Yet Malaysia’s financial markets seems embattled. Why? Has pressures oncommodity exports been exacerbating incipient signs of deflating domestic bubbles?

Interesting. All these have been happening despite the PBoC-BoJ-ECB stimulus.

Remember easy way up can also extrapolate to a rapid decline. Or manias can instantaneously turn into crashes. 

Real time events in the GCC shows the way.

Crashing Oil Prices: OPEC Deadlock, Shale Bubble, Global Liquidity and Philippine OFWs

I recently pointed out that October brought upon us the reality of real time crashes—a dynamic we have not seen since 2008.

In spite of the ECB-PBOC-BOJ fueled stock market boom, crashes seem to be still haunting global markets

From Reuters:

Saudi Arabia blocked calls on Thursday from poorer members of the OPEC oil exporter group for production cuts to arrest a slide in global prices, sending benchmark crude plunging to a fresh four-year low.

Brent oil fell more than $6 to $71.25 a barrel after OPEC ministers meeting in Vienna left the group's output ceiling unchanged despite huge global oversupply, marking a major shift away from its long-standing policy of defending prices.

This outcome set the stage for a battle for market share between OPEC and non-OPEC countries, as a boom in U.S. shale oil production and weaker economic growth in China and Europe have already sent crude prices down by about a third since June.

The sustained crash in oil prices (WTI left, Brent right) has just been amazing

On the one hand, we see record stocks in developed economies backed by record debt. On the other hand, we see crashing commodities led by oil prices. So the world has been in a stark divergence in terms of market actions. 

Prior to the US prompted global crisis of 2008, divergence in the US housing and stocks heralded the (2008) crash.  US housing began to decline in 2006 as stock markets soared to record highs. When the periphery (housing) hit the core (banking and financial system), the entire floor caved in.

Today’s phenomenon (crashing commodities as well as crashing Macau stocks and earnings) runs parallel to the 2008 crash, except that this comes in a global dimension.

Bulls rationalize that lower oil price benefit consumption. This is true. Theoretically. But what they didn’t explain is why oil prices have collapsed and now nears the 2008 levels. Has this been because of slowing demand (which ironically means diminishing consumption)? If so why the decline in consumption (which contradicts the premise)? 

Or has this been because of excessive supply? Or a combination of both? Or has a meltdown in oil prices been a symptom of something else--deflating bubbles?

Yet how will consumption be boosted? Is consumption all about oil?

If economies like Japan-Eurozone and China have been floundering because of too much debt or have been hobbled by balance sheet problems that necessitates for central bank interventions, how will low oil prices improve demand? Well my impression is that low oil prices may alleviate only the consumer’s position, but this won’t justify a consumption based boom. 

Again the problem seems to be why prices are at current levels?

From the production side, what collapsing oil prices means is that oil producing emerging markets will likely get hit hard…

The above indicates nations dependent on oil revenues.

Oil production share of GDP won’t be much a concern if not for the role of domestic political spending (welfare state) which oil revenues finance…

At current levels, almost every fiscal position (welfare state) of oil producing nations will be in the red.

This simply means several interrelated variables, namely, economies of these oil producing nations will see a sharp economic slowdown, the ensuing economic downturn will bring to the limelight public and private debt problems thereby magnifying credit risks (domestic and international), a downshift in the economy would mean growing fiscal deficits that will be reflected on their respective currencies where the former will be financed and the latter defended by the draining of foreign exchange reserves or from external borrowing and importantly prolonged low oil prices and expanded fiscal deficits would eventually extrapolate to increased incidences of Arab Springs or political turmoil.

But the implications extend overseas.

I have pointed out in the past that any attempt to use oil prices as ‘weapon’ (predatory pricing) to weed out market based competitors, particularly Shale oil, will fail over long term

But over the interim, collapsing oil prices will have nasty consequences for the US energy sector, particularly the downscaling, reduction or cancellation of existing projects and most importantly growing credit risks from the industry's overleveraging.

The Shale industry has been a part of the US Fed inflated bubble.

Notes the CNBC: (bold mine)

Employment in the oil and gas sector has grown more than 72 percent to 212,200 in the last decade as technology such as horizontal drilling and hydraulic fracturing have made it possible to reach fossil fuels that were previously too expensive to extract. In order to fund the rapid growth, exploration and production companies have borrowed heavily. The energy sector accounts for 17.4 percent of the high-yield bond market, up from 12 percent in 2002, according to Citi Research.

Falling oil prices will increase credit risks of US energy producers, from the Telegraph

Based on recent stress tests of subprime borrowers in the energy sector in the US produced by Deutsche Bank, should the price of US crude fall by a further 20pc to $60 per barrel, it could result in up to a 30pc default rate among B and CCC rated high-yield US borrowers in the industry. West Texas Intermediate crude is currently trading at multi-year lows of around $75 per barrel, down from $107 per barrel in June.

Collapsing oil prices will thus prick on the current Shale oil bubble.

But the basic difference between oil producing welfare states and debt financed market based Shale oil producers have been in the political baggage that the former carries. 

The current bubbles seen in the energy sector implies that inefficient producers today will simply be replaced by more efficient producers overtime. The industry will experience a painful market clearing adjustment process but Shale energy won’t go away.

The damage will be magnified in terms of political dimensions of welfare states of oil producing nations.

And as previously noted, the non-cooperation or perceived persecution of rival oil producing nations will have geopolitical consequences. There may be attempts by rogue groups financed by rival nations to disrupt or sabotage production lines in order to forcibly reduce supplies. This will only heighten geopolitical risks.

In addition, since forex reserves of producing nations will be used to finance domestic welfare state and defend the currency, such will reduce liquidity in the system

As the Zero Hedge duly notes: (bold italics original)

As Reuters reports, for the first time in almost two decades, energy-exporting countries are set to pull their "petrodollars" out of world markets this year, citing a study by BNP Paribas (more details below). Basically, the Petrodollar, long serving as the US leverage to encourage and facilitate USD recycling, and a steady reinvestment in US-denominated assets by the Oil exporting nations, and thus a means to steadily increase the nominal price of all USD-priced assets, just drove itself into irrelevance.

A consequence of this year's dramatic drop in oil prices, the shift is likely to cause global market liquidity to fall, the study showed.

This decline follows years of windfalls for oil exporters such as Russia, Angola, Saudi Arabia and Nigeria. Much of that money found its way into financial markets, helping to boost asset prices and keep the cost of borrowing down, through so-called petrodollar recycling.

But no more: "this year the oil producers will effectively import capital amounting to $7.6 billion. By comparison, they exported $60 billion in 2013 and $248 billion in 2012, according to the following graphic based on BNP Paribas calculations."

In short, the Petrodollar may not have died per se, at least not yet since the USD is still holding on to the reserve currency title if only for just a little longer, but it has managed to price itself into irrelevance, which from a USD-recycling standpoint, is essentially the same thing.

According to BNP, Petrodollar recycling peaked at $511 billion in 2006, or just about the time crude prices were preparing to go to $200, per Goldman Sachs. It is also the time when capital markets hit all time highs, only without the artificial crutches of every single central bank propping up the S&P ponzi house of cards on a daily basis. What happened after is known to all...

"At its peak, about $500 billion a year was being recycled back into financial markets. This will be the first year in a long time that energy exporters will be sucking capital out," said David Spegel, global head of emerging market sovereign and corporate Research at BNP.

Spegel acknowledged that the net withdrawal was small. But he added: "What is interesting is they are draining rather than providing capital that is moving global liquidity. If oil prices fall further in coming years, energy producers will need more capital even if just to repay bonds."

In other words, oil exporters are now pulling liquidity out of financial markets rather than putting money in. That could result in higher borrowing costs for governments, companies, and ultimately, consumers as money becomes scarcer.

It’s interesting to note how some major oil producers have seen some major selling pressures in their stock markets…

Kuwait Stock Exchange

Saudi Arabia’s Tadawul

Oman’s MSM

Nigerian stock Exchange

The pressures have likewise been reflected on their currencies: USD-Kuwait Dinar, USD-Saudi Riyal and Nigeria’s Naira.

For the populist Philippine G-R-O-W-T-H story, if the Middle East runs into economic and financial trouble or if the collapse in oil prices triggers the region’s bubble to deflate, then how will this translate into OFW “remittance” growth? The largest deployment of OFWs  has been in the Middle East. Or is it that OFWs are immune to the region’s woes?

Interesting.

Will a Collapse in Oil Prices Burst the Middle East Bubble?

Last late June 2014, I noted of tremors in the some of the stock markets of major Arab oil producers, the Gulf Cooperation Council (GCC). The GCC is composed of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. 

The key concern then has been on the region’s escalating wars or increase in social instability, compounded by some worries over property bubbles. Apparently the global risk ON environment has been strong enough for speculators to gloss over or ignore these concerns from which their respective stock markets have partially recovered.

But now a new dynamic compounds on the existing predicaments: Collapsing oil prices in the face of the rallying US dollar.

Pardon me but I will have to compress these charts so as not to make my blog size too big.

As example, one would note of the skyrocketing US dollar against the Kuwaiti dinar and Saudi riyal.

The strong US dollar which has been become a broad based phenomenon has usually underscored a risk OFF environment. As I noted back in mid-September:

As a final note on markets, the US dollar index has been firming of late. Since July 1, the US dollar index has been up by 5%!

The basket of the US dollar index consist of the euro (57.6%), the Japanese yen (13.6%),British pound (11.9%), the Canadian loonie (9.1%), the Swedish Krona (4.2%) and the Swiss franc (3.6%).

Their individual charts reveal that the US dollar has been rising broadly and sharply against every single currency in the basket during the past 3 months.

This may have been due to a combination of myriad complex factors: ECB’s QE, expectations for the Bank of Japan to further ease, Scotland’s coming independence referendum, or expectations for the US Federal Reserve to raise rates in 1H 2015 (this has led to a sudden surge in yields of US treasuries last week), escalating Russian-US proxy war in Ukraine and now in Syria (as US Obama has authorized airstrikes against anti-Assad rebels associated with ISIS, but who knows if US will bomb both the Syrian government and the rebels?) more signs of a China slowdown and more.

Yet a rising US dollar has usually been associated with de-risking or a risk OFF environment. Last June 2013’s taper tantrum incident should serve an example.

So the strong US dollar contributed to last night’s hammering of the US West Intermediate Crude (WTI-lower left) which dived by 3.18% and Europe’s Brent (lower right) which crashed by 4.33%. Yesterday's sharp cascade has been part of the recent downhill trend of oil prices.

The Zero Hedge notes that “WTI has just hit the most oversold levels since Lehman” and “what is gong on with Brent turned out to be far worse, and as the weekly RSI indicator shows the selloff in Brent is now the worst, well, ever!” (bold original)

Some will argue that this should help consumption which subsequently implies a boost on “growth”, but I wouldn’t bet on it. 

Current events don’t seem to manifest a problem of oversupply. To the contrary current developments in the oil markets seem to signify a problem of shrinking global liquidity and slowing economic demand whose deadly cocktail mix has been to spur the incipient phase of asset deflation (bubble bust)

Others argue that this could part of an alleged “predatory pricing” scheme designed as foreign policy tool engaged by some of major oil producers to strike at Russia, Iran or even against Shale gas producers in the US. 

This would hardly be a convincing case since doing so would mean to inflict harm on the oil producers themselves in order to promote a flimsy case of “market share” or to “punish” other governments.

Say Shale oil. There are LOTS more at stake for welfare states of OPEC-GCC nations than are from the private sector shale operators (mostly US). Shale operators may close operations or defer investments until prices rise again. There could also be new operators who could pick up the slack from existing “troubled” Shale oil and gas operators. Such aren’t choices available for oil dependent welfare governments of oil producing nations. As one would note from the above table from Wall Street Journal, at current prices only Kuwait, the UAE and Qatar remains as oil producers with marginal surpluses.

And a shortfall from oil revenues means to dip on reserves to finance public spending. And once these resources drain out from a prolonged oil price slump, the risks of a regional Arab Spring looms.

And the heightened risk of Arab Springs would further complicate the region’s social climate tinderbox. Add to this the economic impact from a weak oil prices-strong dollar, regional malinvestments would compound on the region’s fragility.

Thus, the adaption of "predatory pricing" supposedly aimed at punishing other governments would only aggravate the region’s already dire conditions that risks a widespread unraveling towards total regional chaos.

Two wrongs don’t make a right.

While I don’t expect politicians to be “smart”, their self-interests in maintaining power would hardly let them be dismissive of the welfare state which has been the source of their current political privilege.

As a side note, the region’s complex and deteriorating conditions can be seen in the following developments: Despite aerial bombing by Allied forces, Sunni Islam militants the ISIS has reportedly taken control of much of Western Iraq and has been closing in fast on Baghdad This is aside from advances by the ISIS on the Syrian Kurdish town of Kobani on the Syrian-Turkish border which has reportedly “threatened” to destabilize Turkey

Meanwhile Russia has dipped into $6 billion from its reserve to support her currency the ruble afflicted by sanctions, capital flight and collapsing oil prices. So crumbling oil prices are having a broad based effect on the oil revenue dependent welfare state even from the non-GCC nations.

And as one can see, the GCC has long depended on a weak dollar (easy money) environment. This appears to have now reversed, thus exposing their internal structural fragilities from unsustainable economic bubbles and the welfare state as well as tenuous regional and geopolitical relationships.

This brings us back to the stock markets. There has been renewed signs of stock market tremors among GCC states.

Bahrain’s All Share index appears to be in a topping process, so as with Kuwait Stock Exchange Index whose rally from the Apr-June meltdown appears to have winded down.

Meanwhile Oman’s Muscat index experienced a waterfall as Qatar Exchange Index seems least affected among the GCC, nonetheless has exhibited signs of innate weakness.

Both equity benchmarks of Saudi and UAE crashed 6.5% early this week.

Saudi Arabia’s Tadawul index was hardly affected by the April-June meltdown but the weak oil price-strong US dollar dynamic seems to have permeated to the second largest oil producer (after the US). 

Meanwhile like Kuwait, the seeming recovery of UAE’s Dubai Financial General from the collapse a quarter back seems to have faded. 

Unlike the April-June episode, GCCs stock markets appear to be in unison in signaling a downturn.

I’d say that this serves as reinforcing signs of the periphery to the core dynamics in motion.

Will the current weakness deepen? Or will this just be another cyclical dip? We’ll see.

Has the Middle East Stock Market Bubble been Popped?

Has the escalating violence in Iraq popped the Middle East stock market bubble? Have investors been cashing in to seek safehaven from  further deterioration in region's social conditions?  Or has the current abrupt declines been about raising funds to finance parties engaged in the sectarian war? Or has the Iraq war served as an aggravating factor to a bubble naturally set to bust? 

The following charts are from Bloomberg and referenced from a 3 year perspective

The Bloomberg GCC  200 Index or BGC200 or the “capitalization weighted index of the top 200 equities in the GCC region”. GCC stands for Gulf Cooperation Council or the “regional intergovernmental political and economic union consisting of all Arab states of the Persian Gulf, except for Iraq. Its member states are the Islamic monarchies of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates” (Wikipedia)

The Bahrain Bourse all Share index (BHSEASI). Despite the recent decline, the BHSEASI remains up 14.89% year to date.

The Kuwaiti Stock Exchange Index (KWSEIDX) –8.07% y-t-d

Oman’s Muscat Securities (MSM30) +1.5% y-t-d

Qatar Exchange Index (DSMID) +19.98 y-t-d

Saudi Arabia’s Tadawul All Share (SASEIDX) +13.04% y-t-d

Finally the United Arab Emirates Dubai Financial Market General Index (DFMGI) +36.31% y-t-d

Are these writing on the wall for global stock markets? 

We will see how these will play out.

Stay tuned.

Middle East Stock Market Meltdown: Likely Driven By (Political Economic) Insider Selling

I wouldn’t deny that the meltdown in Saudi stocks, which had been down for 21% for 13 consecutive days have been politically driven. This applies to most bourses in the region too.

But before my explanation let’s go to some expert opinion or mainstream reporting.

According to Bespoke Invest (also the source of the chart above) [emphasis added]

Back in late January, the TASI saw a one-day decline of over 6% on 1/29 when tensions began to escalate in Egypt. When things settled down in Cairo, the TASI rebounded back above its 50-day moving average, but it then began to roll over again when tensions moved to Libya. Watching the charts must be a popular past time in Saudi Arabia, because once the index broke below its January lows, the bottom literally fell out of the index. With the March 11th Day of Rage coming up in Saudi Arabia next week, are traders in this market anticipating a replay of Egypt or Libya?

The Wall Street Journal adds, (emphasis added)

Large scale instability in North Africa and protests in neighboring countries [Bahrain, Oman, Yemen] have culminated in a significant selloff as investors are growing increasingly concerned that protests and subsequent instability could ultimately reach the Saudi market," said an analyst at Riyadh-based NCB Capital. "We firmly believe that fears of instability reaching the Saudi market are overdone, despite reports of calls for demonstrations in the coming days."

Saudi Arabia recently introduced a number of nonpolitical changes, estimated to cost around $36 billion, but there have still been signs of domestic discontent since Tunisia's popular uprising in January.

While foreign investors continued to cut their equities exposure to the region, the selling was mainly retail-driven—exacerbated by margin calls and redemptions at local Saudi funds, traders said.

The reason I’m not gonna deny this politically instigated collapse as a valid driver is that the declines have been far stretched or extended than the counterparts in non-MENA emerging market bourses. This implies something more than meets the eye.

I might add that, aside from foreign investors, importantly, I suspect that the insiders (meaning those economic and political agents whose stakes had been built around the current regimes over the years) could have been liquidating their stakes in fear, that in the event these People Power revolts become successful, the new administrations would resort to the sequestration or a freeze on their assets to appease the incensed populace or as indemnity for their political misconduct.

This has already happened to former Egypt President Hosni Mubarak, whose assets have been frozen by the Egyptian government, while other foreign banks as the Swiss appear to be headed for the same route as seen with its scrutiny of Tunisia’s deposed president Zine al-Abidine Ben Ali’s transactions.

So the likelihood would be for these embattled political economic agents to scramble and exit from conventional asset holdings, and subsequently, divert their assets outside of the region.

So yes, insider selling could likely be a crucial factor in the current market actions, while foreign selling and panicking retail investors have all combined to worsen these conditions.

The Bloomberg GCC 200 Index, a capitalization weighted index of the top 200 equities in the GCC region based on market capitalization and liquidity, reveals of the broad market declines of major Middle East stocks as the People Power movements ripple across the region.

And possibly gold and other commodities could signify as alternative ways to shelter the assets of these insiders.