Mideast Stocks Sink After Saudis Cut Diplomatic Ties With Iran

  • Saudi credit-default swaps jump to highest since May 2009
  • Investors will worry about security spending: Al Fajr

Measuring the Fallout From Saudi-Iran Tensions

Stocks across most Gulf Arab markets retreated amid one of the worst diplomatic standoffs between Saudi Arabia and Iran in about a quarter century.

Qatar’s QE Index led the drop with a 2.6 percent decrease, followed by a 2.4 percent slide in Saudi Arabia’s Tadawul All Share Index. Dubai’s DFM General Index shed 1.6 percent. The cost of insuring Saudi debt against default rose to the highest level since May 2009 on a closing basis.

Saudi Arabia, the Arab region’s largest economy and world’s biggest oil exporter, gave Iran’s ambassador to Riyadh 48 hours to leave the country on Sunday after protesters in the Shiite-majority country stormed the Saudi embassy and set parts of it on fire. The incident followed the kingdom’s execution of 47 people for terrorism-related offenses on Saturday, including a Shiite cleric.

"It’s an unexpected escalation,” said Nabil Farhat, an Abu Dhabi-based partner at Al Fajr Securities. “The rise in geopolitical tension is a major worry for investors as it may mean more government spending on security."

The crisis is the worst between the two regional powers since the late 1980s, when the Sunni-led kingdom suspended ties with Iran after its embassy was attacked following the death of Iranian pilgrims during Hajj in Mecca. Five-year credit default swaps on Saudi Arabian debt rose 27 basis points to 176 basis points, according to data from CMA.

Bahrain also cut ties with Iran, and Sudan asked the Islamic Republic’s ambassador to leave, according to the countries’ official press agencies. The United Arab Emirates has summoned its ambassador in Tehran home and reduced the level of diplomatic representation with Iran to charge d’affaires.

Proxy Wars

Bloomberg’s index of 200 major stocks in the six-nation GCC declined 1.7 percent to the lowest level in almost three weeks. The Tehran Stock Exchange’s benchmark TEDPIX Index was little changed. 

The worsening of relations comes after the slump in oil prices forced the Saudi government to cut spending and subsidies for 2016. The kingdom, which is already leading a costly war in Yemen, is engaged in a number of proxy confrontations with Iran, including the conflict in Syria. Brent crude, a pricing benchmark for more than half the world’s oil, has fallen 29 percent in the past 12 months to $37.84 a barrel at 12:36 p.m. in London.

Countries in the six-nation Gulf Cooperation Council blame Iran for fomenting unrest among Shiites in the region -- especially in Bahrain, where Saudi-led troops helped suppress protests in 2011, and in Saudi Arabia itself. Bahrain’s Bourse All Share Index fell 0.2 percent.

"Saudi tensions with Iran may push foreign players away for a while," said Talal Touqan, the head of research at Abu Dhabi-based Al Ramz Securities.

The U.A.E. is Iran’s biggest trading partner after China, according to data compiled by Bloomberg. The ADX General Index in Abu Dhabi, the nation’s capital, dropped 1.3 percent. U.A.E.-based energy producer Dana Gas PJSC was the most-traded stock on the gauge, as traders exchanged 26 million shares. The equity fell 5.8 percent, the most in a month.

A pipeline between the U.A.E. and Iran was never unused as the company and its partners argued with the National Iranian Oil Co. over gas prices and damages in court.

Kuwait’s SE Index slipped 0.8 percent, and Egyptian stocks slid 1.5 percent. Oman’s MSM 30 Index was the sole gainer in the region, rising 0.2 percent.

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