European stocks sink to 22-month low amid rising Saudi tensions

October 15, 2018

London (Oct 15)  "If the trend we saw last week continues, it is going to be very hard for Europe to rally... The outlook remains very uncertain," Hewson added. U.S. President Donald Trump has threatened "severe punishment" if it turns out that prominent Saudi dissident Jamal Khashoggi, a U.S. resident and Washington Post columnist, was killed while visiting his country's consulate in Istanbul. Many company executives have cancelled plans to attend a Saudi investor conference later this month. There were some pockets of resistance. A 1 percent jump in oil helped Saudi stocks claw back half the 3.5 percent they had lost on Sunday when diplomatic tensions flared over the disappearance of Khashoggi, a critic of Riyadh's policies. Turkey's lira was another riser on Monday, after Trump cheered the release of a U.S. pastor who had been under house arrest in Turkey. Investors hope his release can lead to an improvement in strained U.S.-Turkey relations. But the broader global picture is distinctly cautious. Wall Street futures are flashing red , in contrast to the rebound in U.S. stocks, while Saudi Arabia's riyal currency has been testing the boundaries of its peg at 3.7514 to the dollar - its weakest spot rate since June 2017. The Saudi central bank maintains a peg of 3.75 riyals to the dollar, and usually the currency fluctuates in a range of about 3.7498-3.7503. MSCI's broadest index of Asia-Pacific shares outside Japan also fell 1 percent overnight as Shanghai ended down 1.5 percent and just off a four-year low. Japan's Nikkei slumped 1.8 percent on Monday, with carmaker shares hitting 13-month lows after Washington said it would seek a provision about currency manipulation in future trade deals with Japan. GREATER ACTION MSCI's broadest gauge of the world's 47 top stock markets was off 0.25 percent after a sizeable 3.87 percent decline last week - its biggest since March - to a one-year nadir.

Over the weekend, China central bank governor Yi Gang said

 he still saw plenty of room for adjustment in interest rates and the reserve requirement ratio (RRR), as downside risks from trade tensions with the United States remain significant. In London commodities trading, oil prices were pushing up again amid the Saudi tensions.

Investors suspect the latest developments could undermine the leadership of Crown Prince Mohammed bin Salman and has the potential to eventually destabilise the oil-rich kingdom.

The official Saudi Press Agency (SPA) quoted an unnamed official on Sunday as saying there would be retaliation in the oil market if the West moves to punish the Kingdom. "The Kingdom also affirms that if it receives any action, it will respond with greater action, and that the Kingdom's economy has an influential and vital role in the global economy," the official added, without elaborating. Brent crude futures rose 1.3 percent to $81.50 per barrel, bouncing back from Friday's near-three-week low of $79.23. "People had thought the Saudis would make up for the fall in Iran's output. If they are starting to use oil as their weapon, that will be a whole new chapter," said Kazuhiko Fuji, senior fellow at Research Institute of Economy, Trade and Industry, a think-tank affiliated with the Japanese government.

Investors are also bracing for a European Union summit meeting from Wednesday amid concerns over Brexit. The British pound shed 0.3 percent to $1.3114 after negotiators from the EU and the UK failed to clinch a Brexit deal ahead of the crucial summit.


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