Gulf Spreads May Fall as Trump Favors Iran Sanctions Over Attack

(Bloomberg) -- Investors in Gulf assets breathed a sigh of relief after U.S. President Donald Trump showed restraint against Iran.

Calling off airstrikes and opting for additional sanctions on Iran eases the risk of military combat between the Persian nation and its Arab neighbors, and will probably have a positive impact on GCC spreads, according to Arqaam Capital Ltd.

“While GCC bonds have continued to rally despite the uncertain geopolitical environment, they have under-performed emerging-market peers,” said Dubai-based Abdul Kadir Hussain, the head of fixed-income asset management. An easing of geopolitical risk “may also mean that issuers like Oman that have been waiting for a toning down of political rhetoric might use the opportunity to issue,” he said.

Gulf sovereign spreads have declined about 20 basis points since early June, less than half the drop for emerging markets, according to JPMorgan Chase & Co. indexes.

The region has been churning since the U.S. withdrew a year ago from a landmark 2015 nuclear deal meant to prevent Iran acquiring a nuclear weapon. Tensions spiked in May when four ships were targeted off the coast of the United Arab Emirates. Since then, oil tankers were attacked in the Gulf of Oman, a missile fired by Iranian-backed Yemeni rebels hit a Saudi airport and Iran shot down a U.S. drone.

The downing of the drone prompted airlines worldwide to divert flights away from southern Iran, lengthening travel times. Tehran is set to breach a cap on its enriched-uranium stockpile within days and the risk of war hasn’t been ruled out.

Still, new Iran sanctions “could be a reasonable settlement under the pretense that oil needs to continue flowing from the Gulf to the world,” said Mohammed Ali Yasin, the chief strategy officer at Al Dhabi Capital in Abu Dhabi. “If the pressure continues to be diplomatic, the status quo will continue. But if it becomes military action, it will affect every sector except telecoms.”

Benchmark stock gauges in Saudi Arabia, Abu Dhabi and Qatar each declined at least 1.1% on Sunday.

“The risk of a war has been greatly reduced and we should see some improvement in investor risk appetite,” said Nader Naeimi, the Sydney-based head of dynamic markets at AMP Capital Investors. “But the situation is fluid and the slightest mistake can lead to a sudden outbreak of war.”

To contact the reporters on this story: Abeer Abu Omar in Dubai at aabuomar@bloomberg.net;Filipe Pacheco in Dubai at fpacheco4@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Shaji Mathew

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