Last week was one where even more clouds piled-up on the horizon with the major rift against Qatar in the GCC, the failure of Theresa May to win a majority in the UK elections, the COMEY testimony that left the door opened to further investigation into Donald Trump’s ties with Russia and a significant warning by US investment banks about the stratospheric valuations of the Internet sector.
As a result, the NASDAQ had its First breakdown in many months and the World Equity Index is showing signs of topping up at extremely overbought levels.
The FED will meet next week and what remains to be seen is whether the FED will finally acknowledge that its monetary policy is way too accommodative and fueling a US asset inflation that has the potential to end up in tears and cause significant damages to te American economy.
We have long held the view that the Trump Presidency heralded the end of the American dominance on the world that started in 1949 and that the China Kondratieff cycle has started in 2013.
We may be witnessing exactly that.
A selloff in technology shares spoiled an otherwise buoyant week in the U.S. stock market as companies from Apple Inc. to Nvidia to tumbled. The British pound dropped as the U.K.’s ruling Conservative Party lost its parliamentary majority, plunging the country into uncertainty just days before Brexit negotiations were due to start.
Investors turned their attention to sinking technology stocks following early enthusiasm that had pushed U.S. equity indexes to new intraday highs.
The move lower began when Robert Boroujerdi, global chief investment officer at Goldman Sachs Group Inc., warned that low volatility in Facebook Inc., Amazon.com Inc., Apple, Microsoft Corp. and Google parent Alphabet Inc. may be blinding investors to risks such as cyclicality and regulation. The S&P 500 technology index plunged 2.7 percent.
The U.K. vote capped a series of major events this week — including former FBI Director James Comey’s testimony before the Senate Intelligence Committee on Thursday — that passed with relatively little fuss. Attention will now turn to the week ahead, when the Fed is expected to raise interest rates and the Bank of England, the Bank of Japan and the Swiss National Bank also meet.
- French voters go to the polls over the weekend, this time as part of a two-step process for parliamentary elections. The outcome will decide how much control new President Emmanuel Macron will have to enact his legislative agenda.
- Federal Reserve policy makers are forecast to raise their benchmark interest rate for the second time this year at the conclusion of a two-day meeting next week. Central banks in Japan and Britain are also scheduled to weigh in with policy decisions.
QATAR versus the ARAB WORLD
The rift that erupted last week between Qatar and the other members of the Gulf Cooperation Council taking the world by surprise should not be underestimated.
It marks a significant change in the entire Middle East equation as well as the beginning of the end for the development of radical Islam. For the first time since 2013, there are signs that the Arab and Muslim world has finally realized that it had to start fighting radical Islam and stop financing it, or become lasting pariahs of the world.
Saudi Arabia is taking the lead and a war with Iran cannot be excluded.
( see our post on the subject in our Blog column)
Investors in Qatari stocks, bonds and currency forwards were saddled with losses this week as the country was thrust into the epicenter of an unprecedented spat with its neighbors.
The country’s stock market shrank by about $11 billion in value on Tuesday, the most since 2010, after Middle Eastern countries including Saudi Arabia and the United Arab Emirates cut ties with the Gulf nation. The country’s most liquid bonds tumbled during the week as its sovereign rating was cut and bets against its currency surged. Contracts to protect against a potential default are now at a higher level than those of Peru and Slovenia.
While tensions between the country and Gulf Cooperation Council members aren’t new, “nobody expected how tactical, decisive, straight forward, sharp and well planned” the isolation of Qatar happened this time, said Nabil Al Rantisi, the managing director of Abu Dhabi-based Mena Corp. Financial Services, one of the biggest brokerages in the U.A.E. “That, nobody saw coming.”
Qatar’s main benchmark finished the week down 7.1 percent, its worst weekly performance since December 2014. As the tension escalated during the week, the country’s index became the worst performer globally this year. The QE Index rebounded 3 percent on Thursday.
Institutional investors from the GCC were net sellers of Qatari shares for about 500 million riyals ($137 million) last week, according to data from the local exchange compiled by Bloomberg. .
Yields on $3.5 billion of 3.25 percent sovereign notes due in 2026 climbed more than 40 basis points in the five days through Friday, the most since they were issued in May 2016. S&P Global Ratings last week lowered Qatar’s long term rating by one level to AA- and put it on negative watch on concern the country’s finances will be impacted.
Moody’s Investors Service also weighed in, saying the sovereign credit strength will be negatively impacted primarily on higher funding costs, while a pick-up in foreign investment outflows would drain foreign-exchange reserves, and weaken Qatar’s external liquidity position.
A key interest rate in Qatar jumped to the highest level in almost seven years after rising 19 basis points on Thursday to 2.164 percent. The rate compares with 1.734 percent in Saudi Arabia, 1.489 percent in the United Arab Emirates.
This is a “natural reaction reflecting concerns that Saudi and U.A.E. banks will start to tighten liquidity flows to Qatar and no be longer providing new money,” Apostolos Bantis, a Dubai-based credit analyst at Commerzbank AG, said by phone.
Qatari banks “will take some days or even weeks to replace the lost liquidity from the GCC, and interbank funding transactions among Qatari banks will also dry up over the near-term as they try to preserve liquidity.”
Twelve-month forward contracts for the riyal jumped to 544 basis points as of 11:40 a.m. in New York on Friday, a record high on a closing basis, indicating increased bets Qatar may devalue its currency.
The crisis put the currency, which is pegged at 3.64 per dollar, under unprecedented pressure according to Chris Turner, the London-based global head of strategy at ING. If officials aren’t able to maintain the riyal’s peg to the dollar, it “may be devalued by at least 20 percent, although such a scenario isn’t expected,” because the government has resources to continue defending the currency, he added.
The cost of protecting Qatari dollar debt against default for five years using credit default swaps almost doubled during the week to 112, the highest this year. The cost of similar contracts for Egypt, Dubai, Saudi Arabia and Abu Dhabi also climbed.
Qatari shares are the most volatile in the world. A gauge of 10-day volatility for Qatar’s main stock benchmark rose to the highest level since January 2016, when assets across the region suffered with a slump in oil prices. Volatility will probably persist next week, as investors will be looking for indications that talks are happening between governments, said Al Rantisi, from Mena Corp.