True Test for Saudi Markets Still to Come After Khashoggi Report

(Bloomberg) -- Monday may provide the true test for Saudi Arabian markets following the U.S. intelligence report that said Crown Prince Mohammed bin Salman signed off on the killing of columnist Jamal Khashoggi.

The benchmark Tadawul All Share Index fell 0.5% on Sunday, a move that barely reflected the slump in emerging markets at the end of last week when Saudi markets were closed. The relatively muted response may be a sign of relief that the sanctions announced by the U.S. weren't tougher, though the lower participation of foreign investors on a Sunday might have clouded the picture, analysts said.

President Joe Biden's administration imposed only modest new sanctions on the kingdom when the report was released last week. Still, the president said in an interview with Univision News that he told Saudi King Salman that “the rules are changing” in the kingdom's relationship with the U.S. and promised “significant changes” on Monday.

Saudi Arabia said it “rejects the negative, false and unacceptable assessment in the report” that implicated the crown prince, the king's son and effective ruler.

The report “may affect international institutions' flows into the Saudi market in the short term, especially until Biden's Monday speech,” said Mohammed Ali Yasin, chief strategy officer at Al Dhabi Capital Ltd in Abu Dhabi. “But local money, whether retail or institutional, will be steady.”

Outflows from the Saudi stock exchange rose to a record of 6.6 billion riyals ($1.76 billion) in October 2018, the month Khashoggi was killed at the Saudi consulate in Istanbul. It was the biggest exodus from Saudi markets since the country introduced measures in 2015 that made it easier for foreigners to invest in its stock market.

Saudi bonds will be on investors' radars in anticipation of further measures from Washington. The country's $2.25 billion of dollar bonds maturing in 2061 rallied Friday, with yields falling 3 basis points, after dropping for five consecutive sessions. Meanwhile, the country's risk of default as measured by credit default swaps jumped the most since September.

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