Those slippery petro-dollars

It wasn't that long ago, only last November, Guambat was quoting Alan Kohler, in a post entitled Alchemy, on what a magnificent market petro dollars were creating for the Arab Gulf States' stock markets:

"Take a look at year-to-date returns in the stockmarkets of the region's major oil producers - Saudi Arabia (+96 per cent), UAE (+179 per cent in Dubai and +85 per cent in Abu Dhabi), Kuwait (+84 per cent), Qatar (+77 per cent), and Bahrain (+32 per cent). Also take a look at the urban construction boom - Dubai is starting to look Singaporean in scale."

Take a look at them now:

By the close of trading on May 10th, the Shuaa Capital indices for the top three Arab stock markets, which are published on AME Info, registered the following declines from their recent peaks: Kuwait -17%, Saudi Arabia -53% and the UAE -44%.

Now the news from the Middle East is woe, woe, woe:

Middle East stock markets tumble, a second Asian Financial Crisis?

Why are Gulf stock prices falling when oil prices are hitting record highs?

'Healthy' correction cools off overheated Gulf markets ("Together, the four markets have lost about 100 billion dollars of their capitalisation since the start of 2006." - That sounds REAL healthy!)

Can Middle East stock markets recover their strength?

UAE women trade shares in bourse

About a dozen veiled women, some with only their eyes visible, stare at a large flat screen flashing stock prices inside a female-only dealing room at the Dubai bourse.

Motivated by a desire to make some quick money, share their husbands' passion for stocks or simply fill in time, many housewives in the United Arab Emirates (UAE) have been lured into a bubbling stock market over the past year.

"The problem is that we had a mad rush into stocks at the highest prices," says Salma al-Mansuri, 30, a female financial advisor.

Awash in liquidity from rising oil prices and fueled by the insatiable hunger of Gulf investors for new initial public offerings, stock markets could only go one way -- up.

But the hype and unrealistic stock valuations combined with poor market regulation meant it was only a matter of time before the bubble burst, according to the GRC.

"I do not know what is happening in this market," laments Nora Mahmud, 48, who has seen the value of her four million dirham (1.1 million dollars, 915,000 euros) portfolio slashed in half over the past few months.

Nearby, a woman clad in black from head-to-toe except for the spectacles that cover her eyes, blames unscrupulous speculators for the plunge and says she is determined to hang on to her investments.

"I lost a lot of money on black Tuesday," adds Umm Abdulrahman, 45, referring to March 14 when the Dubai market plunged 11.7 percent in a single day.

"I can't quit now, I must make up my losses, God willing."

But two other women, clutching designer handbags and dressed in silk abayas, the traditional female black robes, say they have lost faith in the market.

"It is like gambling and anyway many women just invested to amuse themselves instead of spending all their money on perfume and clothes," says one who identifies herself only as Shireen.

It is the psychology of market traders that when it's going your way, there's no bad news, but when it's not, everything is bad. It's sort of like being in love. And things are that bad at the moment for the Arab Gulf markets that the whole world stinks:

US dollar weakness likely to crash global stocks

The US dollar appears to be entering a long-awaited devaluation period to compensate for global imbalances. But this is also likely to spark a significant sell-off of US equities and bonds because many investors will not want to hold assets valued in a currency that is in decline.

Last Friday equity markets around the world saw one of their worst days for three years, and this may be just a taste of what is to come if the US dollar bears are proved right.

Kuwait's 1% revaluation against the US dollar was insignificant in itself but a powerful warning about the sentiment of the market which has been impacted by a perceived end to interest rate tightening by the Federal Reserve. With interest rates apparently on hold, the US dollar is less attractive than other currencies such as the euro where interest rates look likely to go higher.

David Bloom, currency strategist at the world's second largest bank HSBC, says this switch is a 'regime change' and forecasts $1.40 to the euro over the next 12 months. His warning is that phase two of a US dollar decline will result is an equity sell-off and 'an increase in volatility and uncertainty across the board.'

Complacency to end
Perhaps this change of pace should not come as such a shock. Equity markets have been remarkably benign for a long period, and a return to greater levels of volatility could be expected. Moreover, global stock markets have just posted a six-year high, and cyclical peaks are not normally long lasting.

On the other hand, the weakness of the US dollar is benefiting precious metal prices which rise in nominal terms to compensate for a weakening dollar, particularly in the case of gold which is a quasi-monetary instrument. So as the US dollar declines further the upward momentum seen in the gold price is likely to continue.

However, the sharpness of an equity sell-off and US dollar decline will determine what happens to precious metals next. If major investors all dump the US dollar and US bonds and equities at the same time then a financial crisis could push even more money into gold as a safe haven asset. But if this crisis deepened then investors might have to liquidate gold positions and gold shares to shore up their balance sheets.

Historical precedent
Many past periods of crisis on Wall Street have been precipitated by major shifts in the value of the US currency, a fact not ignored by the International Monetary Fund whose officials are concerned to ensure that US dollar weakness does not cause a full blown financial crisis. IMF officials are currently in emergency talks with governments and a US dollar support package could emerge.

The intelligent investor will not be too impressed by such developments and if holding long positions in US equities or bonds could well choose to use any period of stability underpinned by IMF intervention as a point to quietly leave these markets. For waiting around for a disaster to strike would not be a bright move.

Also see this Guambat post.