While it was expected that political risk would continue driving sentiment this week with the UK Election just days away, nobody saw it coming that the main story at the beginning of the week would be the unexpected news that a Saudi-led alliance would cut all diplomatic ties with Qatar. This news was felt strongly across regional markets around the GCC region, especially the Qatar Exchange Index that suffered its heaviest fall since 2009 at around 8%.
There was not a great deal of political risk being priced into the regional markets, therefore the markets have been caught off-guard by this unexpected development and this is something that international investors will be monitoring in a week that was expected to be dominated by the upcoming UK election.
Outside of the regional markets around the GCC and some headlines around Oil (more on that below), this news around Qatar has not had the type of impact you would expect (risk-off) and we are actually seeing some buying demand for high-yielding currencies. When it came to the developed currencies the Australian Dollar was the winner of trading on Monday, while the Dollar slipped lower against the emerging market currencies across Asia and high-yielding currencies like the South African Rand. The Mexican Peso looks like the real winner of the markets however, after the Peso strengthened to its highest level since November with the currency climbing 1.6% following projections indicating a narrow victory for the ruling party in Mexico’s biggest state.
As you would expect when it comes to any increase in political tensions across the Middle East, investor attention very quickly turned towards the Oil markets where the price of Oil moved around $1 higher in the early hours of Monday morning trade.
It has to be said however that a $1 increase in the price of Oil is hardly convincing or material in the grand scheme of things when you consider that the Oil markets are vulnerable to speculative shifts in either direction at any given point.
I personally believe that the supply/demand ratio will continue to be the main driver for investor sentiment and unless this unexpected news actually impacts the ongoing supply story that has dominated the market for over two years, investors could brush this news away as trading continues.
My own outlook for the Oil markets remains unchanged, and this is that the commodity should attempt to consolidate somewhere around the $50 region.
If you wanted to attribute how this development could impact the oil market potentially, then you could hypothetically factor in that not much political risk is actually priced into the market at present. If political risk between key producers does accelerate then the market will perhaps need to begin paying more attention to this.
Where does this all leave Qatar? Well that’s one of the many unknowns at this stage. Until an official statement is made on the unexpected developments today it is difficult to tell.
My view is that it would be premature at this stage to suggest that this development could have an impact on the OPEC deal, but a potential risk to monitor might be that Qatar will view this as being provided with less encouragement to comply with the agreed production quota.
This is completely hypothetical however at this stage. In the instance that this did occur, or if other producers included in the OPEC agreement diverted away from the production quota then this would be seen as having negative connotations on the price of Oil.
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