Investors in Qatari stocks, bonds and currency forwards were unexpectedly saddled with losses this week as the country was thrust into the epicenter of an unprecedented spat with its neighbors.

The country’s stock market shrank by about $11 billion in value on Tuesday, the most since 2010, after Middle Eastern countries including Saudi Arabia and the United Arab Emirates cut ties with the Gulf nation. The country’s most liquid bonds tumbled during the week as its sovereign rating was cut and bets against its currency surged. Contracts to protect against a potential default are now at a higher level than those of Peru and Slovenia.

While tensions between the country and Gulf Cooperation Council members aren’t new, “nobody expected how tactical, decisive, straight forward, sharp and well planned” the isolation of Qatar happened this time, said Nabil Al Rantisi, the managing director of Abu Dhabi-based Mena Corp. Financial Services, one of the biggest brokerages in the U.A.E. “That, nobody saw coming.”

Stocks

Qatar’s main benchmark finished the week down 7.1 percent, its worst weekly performance since December 2014. As the tension escalated during the week, the country’s index became the worst performer globally this year. The QE Index rebounded 3 percent on Thursday.

Institutional investors from the GCC were net sellers of Qatari shares for about 500 million riyals ($137 million) last week, according to data from the local exchange compiled by Bloomberg. The stock market is open in Qatar and in most parts of the Middle East between Sunday and Thursday.

Bonds

Yields on $3.5 billion of 3.25 percent sovereign notes due in 2026 climbed more than 40 basis points in the five days through Friday, the most since they were issued in May 2016. S&P Global Ratings last week lowered Qatar’s long-term rating by one level to AA- and put it on negative watch on concern the country’s finances will be impacted.

Moody’s Investors Service also weighed in, saying the sovereign credit strength will be negatively impacted primarily on higher funding costs, while a pick-up in foreign investment outflows would drain foreign-exchange reserves, and weaken Qatar’s external liquidity position.

Interbank Rate

A key interest rate in Qatar jumped to the highest level in almost seven years after rising 19 basis points on Thursday to 2.164 percent. The rate compares with 1.734 percent in Saudi Arabia, 1.489 percent in the United Arab Emirates.

This is a “natural reaction reflecting concerns that Saudi and U.A.E. banks will start to tighten liquidity flows to Qatar and no be longer providing new money,” Apostolos Bantis, a Dubai-based credit analyst at Commerzbank AG, said by phone. Qatari banks “will take some days or even weeks to replace the lost liquidity from the GCC, and interbank funding transactions among Qatari banks will also dry up over the near-term as they try to preserve liquidity.”

Currency forwards

Twelve-month forward contracts for the riyal jumped to 544 basis points as of 11:40 a.m. in New York on Friday, a record high on a closing basis, indicating increased bets Qatar may devalue its currency.

The crisis put the currency, which is pegged at 3.64 per dollar, under “unprecedented pressure,” according to Chris Turner, the London-based global head of strategy at ING. If officials aren’t able to maintain the riyal’s peg to the dollar, it “may be devalued by at least 20 percent, although such a scenario isn’t expected,” because the government has resources to continue defending the currency, he added.

CDS

The cost of protecting Qatari dollar debt against default for five years using credit default swaps almost doubled during the week to 112, the highest this year. The cost of similar contracts for Egypt, Dubai, Saudi Arabia and Abu Dhabi also climbed.

Volatility

Qatari shares are the most volatile in the world. A gauge of 10-day volatility for Qatar’s main stock benchmark rose to the highest level since January 2016, when assets across the region suffered with a slump in oil prices. Volatility will probably persist next week, as investors will be looking for indications that talks are happening between governments, said Al Rantisi, from Mena Corp.

Source:
courtesy of BLOOMBERG

by Filipe Pacheco and Arif Sharif

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