RIYADH, 27 December 2004 — Globally, the dollar fell even as oil prices reversed down and interest rates remained essentially flat. Economic indicators in the US were mixed. A better than expected November durable goods reading of +1.6 percent (consensus +0.7 percent), indicated a healthy pace of manufacturing activity, while the University of Michigan’s final December index reading of 97.1, versus 92.8 for November, showed consumer sentiment rose more than expected during the month. These good news were offset by a disappointing 12 percent decline in November new home sales of 1125K units (consensus 1200K), while the weekly jobless claims of 333K (consensus 335K), was higher than the 316K a week earlier. With many traders taking the next week off, global markets will remain subdued in trading volume, thereby, increasing the possibility of unusual price fluctuations.
In Saudi Arabia, liquidity numbers show a decline although it is still too early to tell if it is a seasonal factor or a trend. The domestic stock market’s recovery from its recent correction was also halted last week as the weekly closing value of the Tadawul index fell for the first time (although by a small amount) since its last correction. The fact that oil prices also fell during the week is too close for comfort because it suggests that oil maybe one of the key drivers behind the market’s ups and downs.
Some analysts suggest caution, noting that Saudi share prices may have recovered “too fast, too soon” after the last correction. A number of other factors, if they continue, maybe beginning to rear their heads as possible negative factors in the months ahead. They include the drop in liquidity in the domestic economy, the first fall in the skyrocketing share price of the newly listed Ettihad Etisalat telecom company, and the lackluster performance of the IPO of the national insurance company, the National Company for Cooperative Insurance (NCCI).
Saudi Arabian Monetary Agency’s (SAMA’s) latest data show that M3, the broadest measure of liquidity in the Kingdom, declined in October after remaining flat in August. Although, the drop was small (SR634 million), this is the first drop since August 2003. Since such drops in liquidity occurred around the same time (July-August) in the past three years, this might simply be a seasonal phenomenon. However, it is notable that demand deposits fell by large amounts in each of the last three months, while time and savings deposits fell significantly in the last two months. These drops were offset by large increases in “quasi-monetary deposits” and cash held by the public, thereby mitigating M3’s fall. The other “negative” factor was the lackluster performance of the NCCI’s IPO.
Analysts suggest the “negative” aspects of insurance as the reason, given the huge oversubscription of the previous two IPOs and the large amount of liquidity in the domestic economy. However, the jury is still out as the IPO continues for another week.
(Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh.)
