Storm Clouds - Markets & Election
Oil crash, Equities rout and the US re-election
The oil crash and Wall Street stock market’s 20% hit from its February 19 peak is a prelude to recession, an escalation of default risk (not just among shale oil drillers in Texas/North Dakota) and the onset of the most catastrophic debt/credit crisis since 2008. New issuance in investment grade corporate bond market has frozen, let alone potential carnage in high yield, leveraged loans, the CLO market, Euromarket loan syndications and emerging markets debt. Contagion in the credit market moves at the speed of light, as we learnt the hard way in 2001, 2008, 2012 and 2016. The word “credit” derives from a Latin word “credere” and the financial markets have lost their “credere” in the overleveraged, mismanaged corporate/bank/sovereign borrowers of the world. As the global recession deepens, the bloodbath in credit spreads will only widen.
Saudi Arabia has the lowest drilling costs/highest spare capacity in the world but it cannot abandon the role of OPEC’s swing producer indefinitely since its budget breakeven price is $85 Brent. The kingdom has $500 billion in sovereign assets but 12% budget deficit to GDP ratio and mega projects cancellation make no sense given its Vision 2030 blueprint. Since 5 million Saudis bought the Aramco IPO with colossal bank leverage and are due bonus shares in June, Saudi Arabia needs to sign an output cut deal with the Kremlin in the next three months to prop up oil prices. Neither Moscow nor Riyadh can afford the geopolitical/financial fallout of an indefinite, protracted price war and “lower for longer” $30 Brent crude. Oil exporters which cannot raise output/borrow to plug rising budget deficits (e.g. Nigeria, Angola, Algeria, Oman etc.) will also lobby for a Saudi-Kremlin rapprochement on prices.
President Trump wanted lower oil/gasoline prices, a lower US dollar and a lower US borrowing costs. He got them all. Yet he also got a 19% hit on the S&P 500 index and he used to boast that the stock market was a report card on his performance. The collapse in crude oil means certain mass layoffs and bankruptcies in the US shale oil states – Texas, Oklahoma, Louisiana and North Dakota. These were all Trump states in 2016 and they might not vote red in 2020. Wall Street bond yields suggest a US recession has already begun and no incumbent postwar president has been reelected in the middle of a recession. Trump’s reelection bid faces storm (Stormy?) clouds.
Matein Khalid is the CIO of Asas Capital