Sunday, April 17, 2016

A Look At The Week Ahead

The question of Saudi Treasury holdings is not so much a threat as a statement of fact. Despite the difficulty of liquidating the position they would be fools to leave such a honeypot of assets where it could be seized.

On the other hand the mere fact that they are spreading the word in an attempt to forestall the release of the 28 pages (and S. 2040) raises questions about their reliability as an ally and whether the "special relationship" is founded on sand, so to speak. In this respect it is similar to the French warnings on the British referendum this June:
France would relocate its migrant camp from Calais to Britain and roll out “a red carpet” for bankers fleeing London if the UK leaves the EU, according to Emmanuel Macron, the French economy minister....
-Financial Times, 3March2016

Now that we've established what you are, let's talk price.

From Marc to Market:

It is never easy, but the week ahead may be particularly difficult for market participants. It will first have to respond to weekend developments.   
First, the front page of the NY Times on Saturday was a report that the Saudi Arabia warned the US if a bill making its way through Congress that would allow it (Saudi Arabia) to be held responsible in American court for the terrorist strike on 9/1, the sheikdom would forced to sell its Treasury holdings, and other US assets, which otherwise could be frozen.  Apparently there have been talks along these lines for several weeks between top Obama Administration officials and Saudi officials.  The issue re-emerged into the public space with the help of a television news show (60 Minutes) that discussed a classified report that is thought to contain some linkage between some parts of the Saudi government (even if not the highest levels) and the terrorists.   
Earlier this year, press reports highlight that while the US Treasury's TIC data estimate holdings of US assets on a country basis, it groups together of OPEC.  The implication is that the holdings of Saudi Arabia, with what appears to be the third most reserves in the world, remains unknown to the public.  The NY Times story cited the Saudi foreign minister saying that $750 bln of US Treasuries and other assets" may be sold in the bill is approved.   
Obama will be abroad in the week ahead.  His trip to London, in which he is expected to press for the UK to remain in the EU was a talking point among investors last week.   Obama has to be careful, even though US interests seem clear.  Imagine another foreign leader, say Russian President Putin, going to the UK and support Brexit.  No doubt many would cry "foul."   
However, given the NY Times revelation, Obama's trip to Saudi Arabia may take on greater significance, even though the press report suggests some uncertainty whether this will be on the agenda.  Still formal or otherwise, it is a subject that it is difficult to see how it can be avoided.   
The market will also have to respond to the outcome of the Doha meeting between many OPEC and non-OPEC oil producers.  Ideas that a freeze could materialize is one of the factors that have helped oil prices recover 20% off the low seen earlier this month.   The tentative agreement struck in February, was conditional on wider participation, and in particular Iran.  Moreover, any agreement should be held to the Reagan Criteria:  Trust but verify.  There is not much of the former and the latter proves difficult in the short-run.   
We have argued from the get-go that Iranian participation could not and would not be secured. The Iranian had just agreed to surrender (or postpone) their nuclear development in exchange for the lifting of the embargo, which had crippled its energy sector.  If it would now agree to a freeze in output, it would have made significant concessions for nothing.   
We had surmised that the astute Saudi officials understood this and had used the prospects of an oil freeze to put a wedge between its rivals Russia and Iran, and deflected the blame for cheap oil among oil producers from itself to Iran.  For the Saudis, we argued it was a political maneuver and not an attempt to relieve the economic pressure stemming from the drop in oil prices, which led to Fitch to cut Saudi Arabia's credit rating last week to AA- from AA.  Fitch's rating is now the same as Moody's (Aa3) and above S&P, which is at A+.  All have stable outlooks.   
Nevertheless, Russian officials have been playing up the possibility of a freeze even without Iran. Here too we have cautioned clients against accepting this at face value.  For Saudi Arabia to participate without the Iranians means to lose market share to their rival, who they are confronting in various fronts, directly and through proxies....MUCH MORE