tv Best Of Bloomberg Markets Middle East Bloomberg November 25, 2017 1:00am-2:00am EST
leaving every competitor, threat and challenge outmaneuvered. comcast business outmaneuver. ♪ tracy: welcome to "best of bloomberg markets: middle east." the major stories driving headlines, the corruption crackdown continued to reverberate, saudi's superrich stashed their cash, just in case, even if they had not been implicated in wrongdoing. robert bugabe calls time on his 37 year rule. and global equities hit record highs yet again. but does the sale of the da vinci for forgery $50 million paint a picture of the market
over exuberance? we hear from one senior analyst who thinks alarm bells should be ringing. the oil market year it for the much anticipated opec meeting, which takes place november 30. saudi arabia's energy minister has told bloomberg the cartel and its allies should announce an extension of their output curves when they gather. russia has not sounded quite as convinced. we have more with our guests and our reporter. i have a chart that i think encapsulates what we have seen in the oil market. this is hedge fund short positions and brent. the red line is the short position just beginning to pick up. it does not look like much. are we seeing some investors take profits off the back of the big rally in oil? or does this mean some people are doubting the strategy we just heard about from the saudi
arabian oil minister? >> we were seeing the longs increasing last week. people will try to balance their books. what you saw from the saudi minister has been trying to minister -- manage expectations to avoid too much movement of money around in a way that would affect forward terms. we saw the saudi minister, the opec secretary-general, earlier this year, meeting with hedge funds and speaking with money managers in new york. they had big impacts on this curve, as well as getting into helping them hedge. they have a big role in how the market unfolds. the saudi minister really trying to manage expectations and show people what to expect going forward. tracy: from an investor perspective, when you think about opec strategy, do you think it has paid off?
and you think it will continue to pay off when you consider production cuts? >> it has taken months for opec and russia to cleanup oversupplied. it works relatively well. oil is close to a two year's high now. it is up almost 40% in june. yes, it worked out. the biggest risk to the short-term market is what you pointed out before. it is the potential for closing down positions by the hedge fund. if you look at the latest reports on that positioning, we are back to the highs of march. as we get closer to the 30th of november meeting, there will be discussions on extending cuts in production. you might see hedge funds taking some profits.
in the long run, there is the report in september by the iea, which was very bullish regarding the long run. the big question mark is what happened -- what will happen in the u.s. it puts a cap on the price in the long run. tracy: do you think that positioning, record alongs on brent, does that mean expectations are high, and is there an expectation of disappointment if they do not get what they want from opec? charles-henry: there is another element that came into action recently that we have seen for the first nine months of the year. all trading days on supply and demand. there is a geopolitical risk premium coming into action. as long as there is the ability in saudi and other places in the
world, stays, probably there would be a premium. it will come back to supply and demand. all eyes would be on the decision by opec. tracy: saudi arabia this week reported an 80% jump in nonoil revenue in the third quarter, meaning it is on course to meet its end of your budget target. good news for a country trying to rein in spending and reduce its reliance on crude. we have more from our guest and our bloomberg economist. i asked how much comfort investors should be taking from the latest figures. >> saudi is on track to meet its best target this year, around 200 billion saudi riyadh. they may actually even over perform. they would have a deficit lower than it budgeted. tracy: in terms of that government spending, there is an expectation when the economy
slows down to boost government spending, particularly toward the end of the year. is that a danger here? ziad: no, it is opposite. what is driving this deficit performance is that they are underspending. we are seeing underspending on the capital spending side that is below what had been budgeted for 2017. on the revenue side, they are not meeting the revenue targets. it is offset by the spending side. tracy: full-year outlook, will we see a full year recession for 2017? ziad: it is mainly driven by cuts in oil production and the result of the opec agreement. not all growth is still positive. tracy: ziad, making his tv debut, thank you so much.
joining us now, the md of a brokerage. i want to take off where ziad did not get to. the burden of those falling on saudi, do you think the political will will be there to maintain the austerity we were just talking about? >> i think they have to continue, they have no other option. i slightly disagree on the fact that they could decrease spending toward the year. in the last quarter you have excess payments that happened to close the books in any budget. the combination we have seen among all revenues is great. there are no details. tracy: it was a very quiet budget announcement, no press announcement, it came late in the day. let's talk about the corruption crackdown, that is the other major saudi story going on. take a look at the chart behind
me. i put up some bond prices that were affected during the corruption cut downs. al baraka perpetual debt, its founder was one of the arrestees. it could be a measure of how investors feel after saudi, given speculation of manipulation in the stock market. how are you feeling about investing in saudi right now? nabil: what is happening in saudi in my opinion is a one-off thing, regarding the arrest we have been seeing and looking at. saudi is trying to change, trying to fight corruption, trying to recoup $100 billion, which is not a bad amount. if they can recoup 100 billion dollars, that can help the budget deficit for two years. investors are waiting to see what are the outcomes of these
arrests. if the offers are settlements to these arrested people to give money back and everyone goes home, i think saudi will come back to be an interesting opportunity for many investors. tracy: there seems to be consensus that in the longer term it is a good thing, plays into reform efforts. in terms of short-term plays, how are you playing it? do tell people to stay away with it? nabil: at the moment, you have to, stay on the sidelines. or just a very small portion of your capital. please bonds, the mass -- the drop was massive. the game is, to wait and see what is the outcome of these arrests, and what will happen. will the government offer settlements to these people? that is the direction. it was more about humiliation to these people. they were not put in jails. what they want is to recoup the money, not actually humiliate or put anyone in prison.
tracy: the ritz-carlton is a pretty plush prison, i have to say. what about the regional impact? we have seen the amara ipo hit by regional tensions. nabil: of course, we are one region in the end. uae and saudi are very close to each other. there was a high level of integration on the political level. it was not really hits, if you want to compare it back. it was covered roughly 15 times. it was not great, but not bad. tracy: up next on the "best of bloomberg markets: middle east," fed up. janet yellen confirms it she will be leaving the central
♪ tracy: welcome back to the "best of bloomberg markets: middle east." janet yellen this week confirmed she will leave the fed once her successor jerome powell is sworn in. yellen could have stayed on because her term as governor does not and until january 2024. her decision to leave full give president trump a fourth spot to fill on the seven person board of governors. i asked a senior market analyst how much freedom trump has to reshape the fed as he sees fit. >> it is a limited amount of leeway.
the voting panel on the fomc is a rotating vote. you have all these governor is at various places around the u.s. it can be dovish or hawkish or the voting panel on the fomc is neutral at any one time. i think it is quite interesting he has not given any indication yet who he is leaning too. my guess, he is not quite sure which way he wants to go in that respect. he is probably looking for hawkish governors. but maybe the economy is not up to having a big panel made up of people like that at the moment. tracy: it is going to be fascinating to watch. in terms of yellen, what do neutral at any one time. think her legacy is going to be? you have to hand it to her, she has embarked on the process of tightening, reducing the balance sheet, beginning the reduction, without roiling the markets as
much as some expected. she seems to have the opposite problem. look at the chart behind me, g #btv 8280. it shows even though the fed has been raising benchmark rates, a continues to ease. surprising given what we were talking about two years ago. jeffrey: it definitely is. her legacy will be how she negated these potential twists and turns and potholes and politics, and cap to the fed on a steady course. -- and kept the fed on a steady course. the taper tantrum made them reassess how they would slow the unwind. governor yellen's legacy will be the navigating of the final part of quantitative easing and moving toward this normalization. the biggest frustration will be that the economy is firing on all cylinders, but wage growth has not appeared. wage-driven inflation, they were
looking to start their tightening process. overall, she has not been high profile like ben bernanke. but she has done a very good job, i feel. tracy: i wanted to get in this question. where do you chase yield? right now you take a look at the yield differential, it is pretty steep. and take a look here, g #btv 6951. i have it up on my bloomberg terminal. even junk bonds, the stocks that should be giving you the best deals, they are just yielding 520%, well below the two decade average. these are among the risk is bonds. even then, it is giving you less
than 6% back for your risky bets. so where do you chase it? jeffrey: this is one of the legacies of our quantitative easing and why it really does have to finish up and be moved, consigned, to the halls of history. so much extortion around the world. in times past, quantitative easing meant banks covered up every single bond in the world. it is pushing investors with a liquidity and risks like junk bonds. you buy a lot of junk bonds and then the yields go down. this is what we are seeing and it is causing distortions everywhere. the federal reserve and ecb are looking to unwind at the moment. we are seeing some slow on the junk bond side. the high-yield decide, some issues in the last few weeks. the high-yield index has creeping -- been creeping higher lately. tracy: the end of an era,
♪ tracy: welcome back, you are watching the "best of bloomberg markets: middle east." robert mugabe finally stepped down as president of zimbabwe this week, bringing an end to 37 years of rule since the country gained independence from the u.k. i asked a reporter whether a constitutional crisis has been averted. >> it seems to be that way. the military seized power a week
ago and most people thought mugabe would be forced to step down very quickly. he managed to cling on for another week or so. but he resigned and left parliament yesterday. now the constitution does seem to have been inverted. the good thing from the military point of view, they can present this as not having been a coup, but rather a step down by mugabe. tracy: will the military step aside and let possibly the people decide? who is going to step into this power vacuum? paul: a few days before mugabe resigned, the ruling party chose the former vice president, emmerson mnangagwa, as the new party leader.
he is said to be zimbabwe's interim leader. and another will be the candidate for elections, to be held sometime in 2018. we do not know the date of those elections. we do not know many details yet. presumably, the opposition party in zimbabwe will be able to run. but there will obviously be a lot of scrutiny on the country to see just how free and fair those elections will be. >> from the markets perspective we have seen the main zimbabwean benchmark falling. that is usually a good thing in the markets. investors seem to be interpreting this as a positive. paul: zimbabwe's market is skewed, special. at the moment, stocks coming down is a good thing. so far, about $6,000 has been wiped off the market capitalization of zimbabwe's main index.
analysts are taking that as the sign of rising confidence in the financial system. that is the comes -- because stocks in the last year became an inflation hedge. the government was printing a new form of money called bond notes, because of a cash shortage. they do not have their own currency, they use the u.s. dollar, which they cannot print. more people piled into equities and that has been reversing in the last week. tracy: accusing a u.k. court of making a flawed decision which it will appeal. they missed a payment on $700 million worth of islamic bonds because they claimed they were not sharia compliant. but the judge ruled english law contracts are enforceable. i asked our finance team leader what the reaction had been to the london court ruling. >> they feel vindicated because
they have said all along that when you sign a contract you have to absolutely honor it. that is what the london court has said. benchmark falling. they feel quite comfortable with this, they are excited. and they feel it encourages dana gas to go back to the negotiating table and try to come up with a solution. tracy: there is an equity component. if you look at the chart behind me, you can see that once this whole drama started in the summer, we saw bond prices fall and equity prices jump. dana gas' results have jumped. if we assume the drama was a time buying method, it seems to be working. >> their operations are quite good, it is a solid company.
the big problem, it is not paid on time by the people it works with. it is not dana gas' fault. tracy: what happens next in terms of the legal process? >> dana gas has appealed the decision in the u.k.. they are also seeking a decision in another city. the court in that city will determine whether or not the actual contract is legal by islamic standards. at this point, it is not clear if of that court does agree, what does that mean for the purchase undertaking in the u.k.? at this point we want to see more clarity from dana gas about where this is going forward. what is exciting, investors feel that at this point dana gas might say it is time to negotiate. tracy: up next on the "best of bloomberg markets: middle east,"
>> welcome back to "the best of bloomberg markets: middle east." we are told several families and businessmen who aren't implicated in the purge are looking at options including switching holdings between more than one company. >> there are all these discussions that we aren't sure how successful this would be. at least it is a step in that direction. more importantly, reflects the fear among some of the kingdom's
richest families and businessman that they might be next or that this probe might widen. the bulk of their assets are domestically held, inside the kingdom. they are scrambling to protect their wealth. tracy: the message is at least getting through. how much does this crackdown start to hurt investment activity in the kingdom, at a time when the saudi economy has been slowing? alaa: that is a great point. the attention is not on investing, but how can we protect what we have? we have seen a drop in private investments, the oil economy more or less stagnant yesterday. the expectation now is that this will extend in the fourth quarter into 2018. that is why perhaps the government is looking into a more expansionary budget in 2018 than previously thought to counter this. tracy: thank you for bringing us the latest. i want to bring in a guest from exotics capital. you are giving your thoughts on
this before. i want to put you on the spot, as well. you say the saudi reform correction crackdown is down to binary interpretation. on the one hand it is a step in the right direction, but you could also see it as a huge centralization of power. which side you find yourself on? >> it is more about the centralization of power. there is a complete sea change underway and saudi politics, moving from decision-making where a consensus was made from a big royal family, to where decisions are streamlined at the desk of one key demand. you can argue the merits of whether that is a long-term, sustainable agreement. but to implement the fast decisions it needs to transform its economy, i would argue that centralization is a necessary if
not efficient step. tracy: we were talking about domestic investment. will they still be coming into the country on the promise of that economic transformation? >> there is foreign direct investment where they come in to set up businesses. certainly there is nothing in this recent set of events that suggests conditions for that foreign multinational investor have changed. it is hard to abandon the atmosphere that was projected during devos in the desert. that was focused on foreign investment. if you look at foreign investors in the stock market, remember this is still coming off a very small base. part of the decision for them is to look at the saudi index. they will have to because sooner or later this will be part of the msci emerging market.
even if they are not overweight in saudi, it will be a market big enough as a part of that index they will have to take a view. the other context, saudi is an equity market is 20% cheaper than the last five years. its trading volumes are 1/3 what they have averaged the past five years. fear, uncertainty and change are not new. they are already reflected in the market. tracy: what about the bond market? you could offer yield. but if you are going to ask for confidence in your economy in the face of the reforms, especially zimbabwe and saudi arabia, where would forward and -- foreign investors go when yields will rise presumably in 2018? alaa: -- hasnain: i think there
is a disingenuous pairing of saudi and zimbabwe in the same segment. having said that, we are talking about dollar bond offerings for foreign investors. all the actions taken in the past couple of weeks have been focused on an elite group of businessmen. i do not think we should view this in a saudi context differently to how you view the application of windfall taxes in developed economies. tracy: up next on the "best of bloomberg markets: middle east," risk on returns with global equities seeing record highs. why are some investors not fully buying into the reality? we hear from ubs. this is bloomberg. ♪
♪ tracy: you are watching the "best of bloomberg markets: middle east." welcome back, the risk on sentiment return to markets this week with indexes hitting record highs across the globe. the bond market has been showing fixed income traders are more concerned the u.s. economy may slow with the gap between the yields and shorter-term bonds narrowing to levels not seen for 10 years. i asked the global chief investment officer for wealth management at ups -- ubs why some investors are not fully buying into the rally. >> it has to do with the geopolitics, people anchoring on the great financial crisis, it has to do with the rapid technology change we see. but at the same time, it is not just the u.s. markets doing well, it spans the globe now. tracy: give us your outlook for
2018 on stocks in general. we have goldman sachs raising its forecast. i think a target of 3000. what are you looking at? >> we look on a six month view. right now we are overweight in global equities. as the world as shown, i am pleased with our positioning because it is a risk on move we see globally. in the global index you are eating up the u.s. but also these other regions that are doing well. we are overweight in european equities versus u.k. equities. because we think the u.k. growth is going to slow a little bit, now that this weakness from the pound has come through. whereas the european economy is doing very well. >> over here in asia we are watching the hang seng, likely going to bridge that 2007 10 year high above that 30,000 mark, possibly reaching a fresh
high here. but a fellow cia -- cio of yours said every contradiction -- contradictory bone in my body is shaking. what highlight do you think could be a headwind to these gains right now? mark: it is of course a great question is something we think about every day. i guess the primary concern we have is not really around flow, but around this inflation picture. if we see a pickup of inflation, particularly in the united states, that is going to force a lot of the central banks to start to act potentially faster and choke off the growth. recessions in the united states are usually coming out of a tightening cycle from the central banks.
i think that is one of our key concerns. we have some others, of course. tracy: i want to pick up on this point. yellen and the fed saying one thing, the fed trying to tighten policy. and the bond market not playing. along -- not playing along. if you look at the yield line, it is flattening, typically a sign of recession. what is going on with that curve and why has the fed been unable to push it up? mark: if you saw the curve invert that would be a sign of recession. that is something we are watching for, we do not anticipate that happening. the long end of the is responding to some of the comments you just showed by janet yellen. a lot of the recent commentary from fed presidents, that they are simply no longer sure that
inflation will necessarily pick up again, i think we are seeing that in the 10 year. that is a very interesting phenomenon. at the same time they have been tightening and preparing themselves for future financial crises, they are also concerned that inflation just is not been responding the way they anticipated. tracy: when a da vinci hinting sold for $450 million earlier this month, it broke all the our world records and triggered warning bells for a senior market analyst. he explains why. >> i should qualify that. it is the only da vinci available in the world from private heirs. what is interesting was the prices for the other paintings in the auction. all these modern impressionists. you would think $30 million and $50 million prices. the guide painted it with a
crude brush at the end of her broomstick. we are in the wrong jobs. someone paid over $30 million for that. i am worried we are at liquidity, so much money flushed around and certain parts of the global community. it is very much like the 1990's when the japanese were buying all these impressionists at ridiculous prices. there was a leading indicator the nikkei was about to crash in japan after 25 years of deflation. tracy: i know which painting you're talking about, i think it is called untitled, which means artist could not even be bothered to name it. i know we are being facetious with these luxury assets and liquidity, but i had a go at mapping this out. take a look at g #btv 5036. it is the price of for re: -- it is the price of ferra versus the assets ofris, federal reserve banks. you can see they are almost in
lockstep. if we extrapolate from that chart, does the reduction of the fed's balance sheet bode well -- mark: this is a really big issue. the markets are complacent. there is the trajectory of u.s. rates and the unwinding of quantitative easing in the normalization of interest rates. there is a whole generation of people in the markets that only experience 0% capital and that is not how the world really works. there will have to be a lot of adjustments, they will take it very gently. it will actually see capital allocated on a more efficient basis rather than chasing high-yield bonds we were talking about, down to yields a 4%. we will see capital allocated more efficiently.
it will strengthen the u.s. dollar and put pressure on assets and may be of those paintings that were bought last week, not being quite the magical investments people thought. tracy: let's talk about the economic side of this equation. even if liquidity is reducing, as long as we have this synchronized global recovery, you would think that provides some help for the market. how much of a boost is that going to be? mark: it is the federal reserve, the first to end quantitative easing, the ecb is now making signals. the bank of england has done one hike and said, we are not touching it for the for seeable future.
everyone is taking it gently. the fact is, they do want to put some money in the bancfirst -- in the bank first so they can cut rates. we want to bring the cost of capital from 0% or 1%, to where it should be. we will see a gradual process. as long as the world economy stays buoyant and china stays buoyant, and we do not have problems with overleveraged economies, i think we can meander our way through 2018 quite safely. tracy: up next on the "best of bloomberg markets: middle east," the republican tax plan may be headed to the senate floor, but can president trump really get his reforms through? the market thinks, maybe not. this is bloomberg. ♪
tracy: welcome back to the "best of bloomberg markets: middle east." turning our attention to the u.s. and the republican tax package that has been approved and is scheduled to head to the senate floor for a vote as soon as next week. i put it to our guest that the markets had doubts about whether they would see the kind of tax reforms that had been previously billed. >> we think it is very likely this gets pushed into the first quarter of next year. because the senate has still to approve their version, and the two drafts are very different. trying to get everyone on the same page and a package acceptable to both the house and senate in just a couple more weeks is quite a big ask. in terms of how the markets have looked at this, i am not sure the moment in the s&p for that indices are really driven by progress for the tax reform or
not. because the sectors that really should benefit the most are the energy sectors. and they have not done well at all. if you look at that stocks that have done well, the tech stocks, they will be penalized on the new bill. they will be penalized with the money they are keeping offshore. perhaps what is driving equity markets is not primarily the tax reform, but other factors. tracy: how significant would tax reform be for the overall u.s. economy? do you have an estimate? khatija: we do not have an estimate because we have not seen what the final bill is. but the way it is going said just the people who will benefit the most are higher earners. and those guys do not go out and spend on the money they are no longer paying in tax. to the extent the reform bill is more than middle income and lower earners, it will not have as big an impact on consumption
as if it was skewed to the lower end of the income curve. we think there will probably be a boost to income next year. but is hard to see it extended over a 10 year period. tracy: there is a big question mark hanging over, and its name is the yield curve. it continues to flatten. i will put it up on the chart behind me. the spread between the two year and the 10 year at its lowest in about a decade. what is your interpretation? khatija: the short answer, i have absolutely no idea. it boggles the mind that in a world when you expect rates to rise dramatically next year, and the story of economic fundamentals is quite positive, the yield curve should absolutely show a much bigger spread than it is at the moment. it suggests the market does not believe the economic -- the economy is as strong as what
they said just. the yield curve like this suggests we're on the cusp of a slowdown. and if so, we are headed into recession in the u.s. it does not tie in with the economic data we have seen. i do think there have to be other factors at play in terms of what is driving the spread. if you ask me why, i have to say i do not know. tracy: we are getting minutes from the fomc's meeting. how do you think the fed is looking at the yield curve? and does that relentless flattening complicate their tightening? khatija: i do not think they can move away from what they communicated best far. their communication over the past few months has been in favor of another rate hike in
december, and another three in 2018. that is what the dots have been saying, what the fed officials have been saying, and what the minutes have been indicating. the terms that have been used have become progressively stronger. the fed is now seeing stronger economic growth, a stronger labor market for some time. that tells us they need to start hiking smaller than they have. i am not entirely sure. they make it seem like the market is not believing them. they need to continue with what they have indicated to build up credibility. tracy: very quickly, is there a risk as a push up and invert the curve? khatija: i think that is unlikely. timing will be gradual. as long as economic data continues to support that, they will have to adjust. tracy: that is it for this edition of the "best of bloomberg markets: middle east." a busy week lies ahead, including the all-important opec meeting. we will be here for the trading
♪ jonathan: from new york city, 30 minute dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: coming up, is a federal reserve losing conviction? europe's economy booming but german bond yields refusing to climb. a route in the chinese bond market. rhythm is flattening in the treasury curve. >> what is troubling is how fast the curve has flattened in the last few weeks. >> it almost always flattens when the fed is putting rates