Egypt and the Stock Market

The stock market hates uncertainty of any type. It does not matter what causes the political or economic ambiguity—simply the fact that it exists creates nervousness in the world’s financial markets. The recent uprising in Egypt is a prime example of the type of political doubt that can throw stocks into turmoil. Although the protestors succeeded in forcing Egyptian President Mubarak to end his 30-year, dictator-like rule, uncertainty and confusion will continue arising from the country until the elections are held in September. Egypt is particularly troubling to the world’s financial markets since it really doesn’t fit the standard model of pricing systemic risk. Pimco’s chief Mohamed El Erian did a great job explaining this unique situation in an interview with the Beyondbrics blog, “Markets are comfortable pricing the systemic impacts of one or more of three things: a large economy, which Egypt isn’t; an economy that controls a commodity price, which Egypt doesn’t; or an economy that owes a lot of money to somebody, which Egypt doesn’t.” When asked what investors should do in light of this situation, El Elrian went on to say, “It’s very hard to price in the systemic effect of geopolitical risk. One possibility is that the protests will get violent and we would see a risk-off trade, with higher oil and so on. The second is that there are more political developments involving Mubarak stepping down, when we would see a risk-on trade. The most likely is that we will stay in the status quo and markets will go on being edgy.”

Well, right now, it looks like things have temporarily calmed down in Egypt. Mubarak has stepped down, handing power over to the military. The protestors got their wish, but in exchange for military rule prior to the expected September elections. As you know, in most cases, protestors and the military are generally not the best of friends. Whether or not the population accepts the new military ruling body remains to be seen. Provided the history of these types of situations, if the protestors decide they are not happy with waiting for the September elections, and or, if the military brass gets power drunk, Egypt could experience bloodshed and chaos heretofore not witnessed. Let’s hope the people of Egypt peacefully accept the temporary military rule and that the military follows the will of the people in facilitating the pending elections.

It looks like international stock markets are applauding the lessening of Egyptian tensions. According to the Dow Jones Newswire, the region’s financial markets are climbing over the weekend. Doha’s share market led the Gulf rally with the QE Index closing 0.7% higher at 9016.03. Abu Dhabi’s main gauge climbed 0.6% to 2727.71, while stocks in Dubai jumped 0.4% to 1604.19. Saudi Arabia’s Tadawul Index dropped 0.1% to 6626.89, after gaining 0.4% Saturday. Most interestingly, the Egyptian stock market is expected to reopen on Wednesday but with serious circuit breakers in place. The market has been closed since January 27th. The exchange has suspended day trading and will stop trading for 30 minutes anytime the EGX 100 moves more than 5%.

While it appears that the worst is over in Egypt, uncertainty still reigns supreme until a clear cut plan emerges. Investors need to keep a close eye on the situation until a solid and accepted leader assumes the Presidency.

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