RIYADH, 20 December 2004 — The big news of last week was the rebound in the Saudi stock market, following unexpected rebound in oil prices. Globally, the US dollar rallied only to be beaten back down again as its medium-term weakness remains. As we approach the winter holiday season, markets will be subdued, barring unexpected political or security events.
Crude oil price (Brent) jumped by over $7 a barrel (19 percent), from $36.30 last week to $43.45 per barrel as a heavy cold spell hit the US right after OPEC announced that it will cut overproduction by 1 million barrels per day (bpd) starting Jan. 1, 2005.
The reversal in the Saudi stock market was equally dramatic. It clawed itself back to above the 8,000-mark to close at 8,175.76 points on Thursday. This shows that the Saudi stock market is following oil price trends and can be expected to have steam as long as oil prices remain high.
In addition to the oil price rally, Saudi shares were also helped by strong dividend announcements from Riyad Bank and other banks (Riyad Bank also announced an increase in its capitalization from SR4 billion to SR5 billion. Its share was the market’s top gainer last week).
Globally, the dollar’s rally was shortlived despite a number of dollar-supporting news because the medium-term underlying dollar-weakening factors remain firmly in place.
While the US third quarter current account deficit was better-than-initially announced ($164.7 billion against $166.2 billion), the higher-than-expected trade deficit number for October showed that it was only a temporary (and, perhaps, over) phenomenon. The reversal in oil prices also put a dent to the dollar’s rise.
As a result, the market ignored President George W. Bush’s remarks last week that his administration will do its best to hold the current account deficit down. Markets also ignored an upbeat US economic forecast from the White House for 2005.
“The economy is in very solid shape”, pronounced the White House chief economist, after forecasting a slightly lower 2005 GDP growth of 3.5 percent (against 3.9 percent forecast earlier).
In one of its year-end highlight reports, Morgan Stanley says that the US personal savings rate is the key factor in US imbalance underlying the current account deficit and the dollar’s weakness.
US consumers are saving less and spending more than they ever did for such a sustained period of time, thereby causing too much import.
The high consumption (or low personal savings) is sustained by historically low interest rates (real interest rates are barely at 0 percent), and a financial market bubble (the resulting “wealth effect” drives up consumption) that the US Fed, according to Morgan Stanley economists, has been too slow in countering.
(Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh.)