Trump team will make waves in GCC energy and capital markets

New US treasury and energy secretaries will keep interest rates high

November 29, 2024, 2:47 PM

Lower energy prices are likely under Scott Bessent, Donald Trump's pick for treasury secretary

Trump’s choice of Scott Bessent as the next US treasury secretary has reassured the bond market, inducing yields on the bellwether US Treasury note to fall from 4.45 percent to 4.30 percent.

Bessent is a global macro hedge fund manager who worked with George Soros and Stan Druckenmiller for decades on Wall Street and understands the psychology of capital markets all too well.

Yet open interest in bearish Treasury bond option trades has risen since the election. The debt markets are braced for higher yields in the 4.45-4.75 percent range in the 10 year note by next February.

November non-farm payrolls, inflation data and the smoke signals from the December Federal Open Market Committee will play a crucial role in determining the short-term direction of interest rates. Year-end window dressing by financial institutions complicates the outlook.

The latest JP Morgan positioning data suggests that the consensus view in the bond market is for higher interest rates at the long end as a 3.3 percent annualised CPI (consumer price inflation) and 2.7 percent core PCE (personal consumption expenditures – another measure of inflation) will make the Powell Fed reluctant to ease the overnight borrowing rate too aggressively as long as the economy remains near full employment.

This means the US dollar will remain well-bid – attractive – against the Euro as the German manufacturing recession deepens. It will prompt a faster pace of rate cuts by the ECB to avert deflation risk at a time of political gridlock in both the Bundestag and the French National Assembly.

The president-elect’s worldview is likely to weaken global energy prices

The implications for GCC financial markets suggest that bank stocks will outperform due to resilient interest rate spreads and higher loan growth metrics in both the UAE and Saudi Arabia.

The prospects for a steeper US Treasury yield curve imply outperformance in the two- to five-year segment of the GCC loan/sukuk market versus longer duration debt. A strong dollar also helps regional central banks to contain domestic inflation risk.

Scott Bessent’s new job makes him the most powerful finance minister in the world. His close relationship with Trump means that he will champion the President-elect’s economic policy agenda.

Bessent’s reputation as a fiscal hawk has led to a 3 percent fall in gold prices. It is helping contain a rise in the inflation risk premium in the Treasury bond market, a positive for frequent borrowers in the offshore dollar debt markets such as Saudi Arabia, UAE, Oman and Bahrain.

Bessent will necessarily be forced to blunt the impact of Trump’s draconian tariff hikes on Chinese imports and restrain the dollar’s surge on Planet Forex.

The global economy cannot afford the deflationary chill of an emerging market sovereign debt crisis. Economic stability in the wider Arab world in the aftermath of multiple wars is in the national interest of every GCC state.

Global energy shifts

Trump’s decision to nominate Chris Wright, a Colorado oil and gas CEO, as energy secretary is a game changer for global energy markets. Wright is a passionate fossil fuel advocate and climate change sceptic.

Wright embodies Trump’s ’drill baby drill’ mantra. He will end Biden’s pause on American LNG exports and remove environmental restrictions on shale oil drilling in Alaska and the Gulf of Mexico. Wright is one of the pioneers of the fracking revolution which has enabled the US to surpass Saudi Arabia and Russia as the world’s leading oil producer.

The collapse in solar and wind turbine stocks after Trump’s election and the relative failure of the Cop29 summit in Baku demonstrate that green energy will not be a winner segment under Trump 2.0.

Trump’s impact on crude oil and natural gas markets is mission-critical for the GCC states for obvious reasons. The president-elect’s worldview is likely to weaken global energy prices. Trump will do his best to boost America’s shale oil and LNG output at a time when both China and Europe face economic and industrial headwinds.

The oil glut will be amplified by new supply from Guyana, Canada, offshore Brazil and offshore West Africa. This will be added to with quota-cheating by Iraq, Nigeria and Kazakhstan.

Under Trump 2.0, the geopolitical risk premium for oil is likely to shrink. It will be driven by his push for an immediate end to the Ukraine war and his aversion to new US military commitments in the Middle East.

However, if Trump resumes his first term “maximum pressure” sanctions on Iran or sanctions an IDF airstrike on the export terminal at Kharg Island, the oil market could face a short term supply shock. Saudi Arabia can however easily offset this since its output of 9 million barrels per day is at a four-year low and far below the kingdom’s spare capacity.

Riyadh, Washington and Moscow have a vested interest in making sure that Brent does not collapse below $60 a barrel.

Matein Khalid is the chief investment officer in the private office of Abdulla Saeed Al Naboodah and the CEO designate of a venture capital firm. He is also an adjunct professor of real estate investing and banking at the American University of Sharjah