Just in case Glencore’s stock slide and general market volatility have distracted you from fully digesting the significance of this Saudi Arabia funding story from the FT’s Simeon Kerr in Dubai…
We thought we’d reiterate the really important bit about the rate at which the Kingdom is pulling funds from global asset managers:
What the story doesn’t emphasise is how this links into the wider eurodollar recycling thesis, a.k.a the direct consequence of the hypothetical eventuality of no more petrodollars.
We’ve previously explained how the causation works here.
Loosely speaking, the market tends to over-simplify the recycling story by presuming money which flows from rich countries to oil nations is always promptly reinvested into Treasury bonds or equity and property ventures in the US.
In reality, the money tends to be invested in “global asset management” funds (offshore) which often offer access to structured products specifically designed to send capital market funding to investments further afield. Via this yield grabbing process, petrodollars flow into much riskier equities (often with an EM flavour) or — in some cases — into even less liquid but supposedly safe yield-enhancing arbitrage plays often associated with commodities.
Remember how vendor financing worked?
Well, it’s not dissimilar. Dollar or hard currency-denominated capital ends up being allocated to EMs or other consumers who need hard currency to equity-fund their commodity and import purchases with. It’s all a virtuous circle until the funding pipeline begins to contract — namely, because of diminishing dollar flows abroad.
The repatriation of Saudi funds from global asset managers may in this way be directly correlated with declining credit availability to emerging markets and — in the face of diminishing bank credit availability to commodity traders — to commodity traders for arbitrage plays and such the like.
In any case, we suspect there will be a lot of off worried asset managers around, if not a hunt for eurodollar (dollars abroad) liquidity.
Related links:
This is not the oil rally you’re looking for - FT Alphaville
Why it’s not an oil breakdown story, it’s a money story – FT Alphaville
Eurodollars, FX reserve managers and the offshore RRP issue – FT Alphaville
Offshore repo, capital charges and petrodollars – FT Alphaville
The bond liquidity ‘cognitive bandwidth deficit’ problem -FT Alphaville
All about the eurodollars, China edition - FT Alphaville
The BoE as eurodollar dealer of last resort? – FT Alphaville
All about the eurodollars – FT Alphaville
On the hypothetical eventuality of no more petrodollars – FT Alphaville
With petrodollars also go global reserves – FT Alphaville
Hello world. I’m the PetroEuro! – FT Alphaville
We thought we’d reiterate the really important bit about the rate at which the Kingdom is pulling funds from global asset managers:
Nigel Sillitoe, chief executive of financial services market intelligence company Insight Discovery, said fund managers estimate that Sama has pulled out $50bn-$70bn over the past six months.And also this:
“The big question is when will they come back, because managers have been really quite reliant on Sama for business in recent years,” he said.
Since the third quarter of 2014, Sama’s reserves held in foreign securities have declined by $71bn, accounting for almost all of the $72.8bn reduction in overall overseas assets.
While some of this cash has been used to fund the deficit, these executives say the central bank is also seeking to reinvest into less risky, more liquid products.For “global” we think it’s fair to read EM.
“They are not comfortable with their exposure to global equities,”said another manager.Fund managers with strong ties to Gulf sovereign wealth funds, such as BlackRock, Franklin Templeton and Legal & General, have received redemption notices, according to people aware of the matter.
What the story doesn’t emphasise is how this links into the wider eurodollar recycling thesis, a.k.a the direct consequence of the hypothetical eventuality of no more petrodollars.
We’ve previously explained how the causation works here.
Loosely speaking, the market tends to over-simplify the recycling story by presuming money which flows from rich countries to oil nations is always promptly reinvested into Treasury bonds or equity and property ventures in the US.
In reality, the money tends to be invested in “global asset management” funds (offshore) which often offer access to structured products specifically designed to send capital market funding to investments further afield. Via this yield grabbing process, petrodollars flow into much riskier equities (often with an EM flavour) or — in some cases — into even less liquid but supposedly safe yield-enhancing arbitrage plays often associated with commodities.
Remember how vendor financing worked?
Well, it’s not dissimilar. Dollar or hard currency-denominated capital ends up being allocated to EMs or other consumers who need hard currency to equity-fund their commodity and import purchases with. It’s all a virtuous circle until the funding pipeline begins to contract — namely, because of diminishing dollar flows abroad.
The repatriation of Saudi funds from global asset managers may in this way be directly correlated with declining credit availability to emerging markets and — in the face of diminishing bank credit availability to commodity traders — to commodity traders for arbitrage plays and such the like.
In any case, we suspect there will be a lot of off worried asset managers around, if not a hunt for eurodollar (dollars abroad) liquidity.
Related links:
This is not the oil rally you’re looking for - FT Alphaville
Why it’s not an oil breakdown story, it’s a money story – FT Alphaville
Eurodollars, FX reserve managers and the offshore RRP issue – FT Alphaville
Offshore repo, capital charges and petrodollars – FT Alphaville
The bond liquidity ‘cognitive bandwidth deficit’ problem -FT Alphaville
All about the eurodollars, China edition - FT Alphaville
The BoE as eurodollar dealer of last resort? – FT Alphaville
All about the eurodollars – FT Alphaville
On the hypothetical eventuality of no more petrodollars – FT Alphaville
With petrodollars also go global reserves – FT Alphaville
Hello world. I’m the PetroEuro! – FT Alphaville
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