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Daily Agenda: Plunging Oil Prices Spark Gulf Market Swoon

Chinese sovereign wealth fund equity investment fails to curb sell-off; Donald Trump takes aim at alternative managers.

Equity markets of states along the Persian Gulf took a beating during trading yesterday, with the benchmark Tadawul all-share index (TASI), which tracks the Saudi Stock Exchange in Riyadh, sliding by almost 7 percent for the session. The selling continued at a more moderate pace today with the TASI off by nearly 1 percent in early session trading. According to data from Markit, five-year credit default swaps on Saudi sovereign debt rose by 76 percent last week. Saudi, effectively the boss of the Organization of Petroleum Exporting Countries, calls the shots on oil production and supply — a role of particular global interest amid the ongoing slump in commodities prices and the North American wave of shale oil output. On Friday, New York-listed WTI crude oil front-month contracts fell below $40 for the first time in more than six years while in early trading today, Brent contracts in London also fell to 2009 levels after breaking below $45. North American producers meanwhile have shown no signal that they are willing to end their war of attrition with OPEC’s primary players. On Friday, Houston–based oil field service company Baker Hughes released rig count data that showed total wells in production actually rose for the week despite rapidly dropping prices.

China’s sovereign wealth fund fails to boost sentiment. China’s State Council approved a measure yesterday to allow as much as 30 percent of the investments of the China Investment Corp., the nation’s sovereign wealth fund, to be allocated to domestic equities, a potential increase of more than $150 billion. Rather than rallying on the news, equity markets reacted by plunging to close to a decline of 8.5 percent during trading today. The sell-off spread across Asia-Pacific markets, with major declines across all of the region’s primary indexes.

Election called in Turkey as currency and stocks plummet. One day after the deadline set by a deadlocked election in June when the ruling Justice and Development Party lost its parliamentary majority, Turkish President Recep Tayyip Erdogan was expected to call for a new election to take place November 1. The Turkish lira fell by nearly 1 percent against the U.S. dollar this morning, dragged down by fears of political instability combined with the broad emerging-markets slump and increased hostilities with ISIS and Kurdish separatists. The Borsa Istanbul 100 index sank in early trading on the news.

Volatility indexes spike. Today the VStoxx index, which measures the volatility implied by pricing for the EURO Stoxx 50 index, rose to over 35 to a multiyear high after the more broad-based Chicago Board Options Exchange (CBOE) Volatility index (VIX) climbed above 28 on Friday for the first time since 2011. Commodity markets also felt the pressure, with the CBOE crude oil volatility index touching levels above 45 on Friday on a sharp rise for the week.

Trump takes aim at alternative managers. During an appearance on CBS news program Face the Nation yesterday, Republican presidential candidate Donald Trump vowed to take aim at unfair advantages for “the hedge fund guys” in statements less eloquently echoing those of Democratic front-runners. So far, others vying for the Republican nomination have made little headway against poll-leader Trump in their arguments that some of his policy views resemble those of the left side of the political spectrum.

BlackRock poised to enter rental market. Amid U.S. Census Bureau estimates on home ownership during the second quarter to be at the lowest level since the 1960s, financial firms are increasingly entering the residential rental market. According to media reports citing anonymous sources, BlackRock is set to become the latest Wall Street player in the segment with a new fund launch focused on financing investors buying and renovating single-family rental units.

Portfolio Perspective: Assessing Risks in Commodity Markets

“The continued fall in oil prices and uncertainty about China’s growth prospects have added further downside risks to Saudi Arabia’s macroeconomic outlook. We have lowered our growth forecasts on weaker nonoil growth and see further widening in the current account and fiscal deficits compared to our June forecasts.”

Miswin Mahesh, Barclays

“The downtrend in crude oil is strong and intact. Little to do here except hold tactical shorts. We see no reason to buy energy stocks at this time. Wait.”

Adam Grimes, Waverly Advisors

“There may be an opportunity to take advantage of a deeply oversold and unloved commodity: copper. The metal’s price has plunged 50 percent from the 2011 peak and one has to wonder if sentiment is so beat up that the next move is a classic countertrend rally. Inventories are not a problem with Shanghai stockpiles just about cut in half over the past four months as Chinese imports basically have flatlined over the past year. Unlike oil, this is one market that is facing a supply deficit — not the other way around.”

David Rosenberg, Gluskin Sheff + Associates

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