Stock prices in Saudi Arabia soared to their highest level in months signaling traders in the kingdom believe progress has been made in the euro zone
Saudi investors signal guarded approval of EU debt agreement
Saudi Arabian investors gave a tentative vote of confidence in the outcome of the European summit yesterday, but some analysts warned there were still obstacles to overcome before the crisis in the euro zone could be declared over.
The Tadawul All-Share Index in Riyadh, the only market open in the Middle East yesterday, rose 0.81 per cent to 6,302.84, its highest level since early August.
The rise followed the positive movements on European and US markets after the announcement in Brussels on Friday of a new strategy to tackle Europe's sovereign and banking debt crises.
The new EU rules make for greater fiscal integration among 26 of the member countries, with only Britain staying out. The pact will impose supervision and automatic penalties on countries that breach agreed ceilings on public borrowing and will allow the European Central Bank (ECB) more financial firepower to buy euro-zone debt in the market.
It also ruled out forcing private bondholders to take losses on their investments.
Along with better-than-expected consumer confidence figures in the US, the news from Europe lifted most markets.
"It's a combination of positive factors aligning to buoy investor sentiment. The gains on US and European markets over the weekend coupled with the lack of negative surprises from the European summit are fuelling the upward movement on the Tadawul," Asim Bukhtiar, an equity analyst at Riyad Capital, told Bloomberg News.
Other Saudi economic experts, however, warned that the euro-zone crisis could still run further.
Jarmo Kotilaine, the chief economist at National Commercial Bank, the biggest bank in the kingdom, said: "Maybe you shouldn't read too much into one day's trading. The outcome of the euro summit was a mixed bag, and there will be negative and positive factors emerging in coming days and weeks.
"Saudi markets take their cue from overseas reactions, and there is the paradox of all GCC markets, which are dominated by retail investors, who are very influenced by events such as the euro-zone crisis."
Mr Kotilaine said it was crucial to see how markets would react in the next few days to the Brussels strategy. "There is a pattern that has emerged here over the past year. All the summits and meetings are expected to produce a solution, then the realisation sets in that there are still structural problems in the EU, bond yields go up again and the market becomes less convinced.
"I think that's what will happen again this time. The financial markets wanted to see greater empowerment for the ECB and an EU-level bond issuance programme, and they didn't get enough of those. What happened in Brussels was more about stopping future crises than about solving the one they've got now."
Mr Kotilaine said that if the euro-zone proposals did not succeed, there could be serious negative repercussions for Saudi Arabia and the GCC.
"The economic costs could be huge. The region could be impacted by recession and a falling oil price. You have to ask yourself: what would be the economic knock-on effects of a European recession on Asia, and what effect that would have on the oil price?"
Crude oil prices jumped back to near the US$100 per barrel mark last week on the good US consumer news.
Mr Kotilaine said, however, that banks in the GCC region, and especially Saudi Arabia, had learnt important lessons since the liquidity crisis of 2008 sparked by the collapse of Lehman Brothers bank in the US.