Global Markets Shaken by Egypt Turmoil
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Like no other recent event since the global financial meltdown of Black September 2008,
the unfolding turmoil in Egypt is unnerving financial actors all over the world.
On Wall Street, it’s known as a “Black Swan,” an allegedly exogenous event —
a sudden political or economic jolt that supposedly cannot be predicted or modeled,
but sends shockwaves rippling through the global political economy.
Like no other recent event since the global financial meltdown of Black September 2008,
the unfolding turmoil in Egypt is unnerving financial actors all over the world.
On Wall Street, it’s known as a “Black Swan,” an allegedly exogenous event —
a sudden political or economic jolt that supposedly cannot be predicted or modeled,
but sends shockwaves rippling through the global political economy.
Investors have largely shrugged off several of these unexpected developments recently, including the sovereign debt crisis in Europe,
but the situation in Egypt has the potential to cause more widespread uncertainty,
especially if oil and other commodities keep surging, or the unrest spreads to more countries in the Middle East.
Until now, the stock market in the United States has defied several outside threats, including
- the rising risk of food inflation,
- interest rate increases in China, and
- sovereign debt troubles in Europe,
said Sam Stovall, chief investment strategist of Standard & Poor’s Equity Research.
“But as is usually the case, a boxer never gets knocked out by a punch he’s looking for,” he said.
“This could be what triggers the decline. Geopolitical events are very, very hard to model”–
which, of course, is why we so strongly emphasize POLITICAL economy,
both in principle, and because, despite what Wall Street would like to pretend,
events like what’s happening in Egypt are NOT impossible, or even all that difficult, to predict.
Last week, the Dow Jones industrial average nearly surpassed the closely watched 12,000 level,
but fell 166 points in late trading Friday as the protests in Egypt intensified and oil prices jumped 3.7 percent to $89.34.
A sustained increase in oil prices could choke growth in not just the US but throughout the world, analysts said.
It could also undermine the more general optimism that lifted the Standard & Poor’s 500-stock index by 1.5 percent in January, after a 12.8 percent jump in 2010.
“A one-dollar, one-day increase in a barrel of oil takes $12 million out of the U.S. economy,”
said Jason S. Grumet, president of the Bipartisan Policy Center, a Washington research group.
“If tensions in the Mideast cause oil prices to rise by $5 for even just three months, over $5 billion dollars will leave the U.S. economy.”
Obviously, this is not a development that is propitious for creating new jobs.
Egypt is not an oil exporter, nor is its stock market a regional heavyweight.
As the home of the Suez Canal and the nearby Sumed pipeline, however,
it is one of a handful of spots classified as World Oil Transit Chokepoints by the Energy Department,
and events there can have an outsize impact on global energy prices.
The 141-year-old canal is just 1,000 feet wide at its narrowest, and it cannot handle supertankers,
forcing shippers to rely on the pipeline or smaller vessels to move the crude.
Roughly 2.9 millions barrels of oil a day, 2.6 percent of global production, passed through the canal and the pipeline in 2009, the Energy Department said.
As a percentage of world oil demand, that may not sound like much,
said William H. Brown III, a former Wall Street energy analyst who consults for hedge funds and financial institutions.
“But prices are determined at the margin and that’s a lot of oil in markets these days,”
said Mr. Brown, who estimates global spare production capacity at 2.5 million barrels, the bulk of it in Saudi Arabia.
While prices are set globally, the immediate impact of any interruption would be felt primarily in Europe,
which relies heavily on jet fuel, heating oil and other distillates refined in the Middle East and shipped via the canal and pipeline.
Israel is also a major importer of Egyptian natural gas under a pact that dates to the 1978 Camp David accords.
Given the confrontations with authorities in Cairo, Alexandria and other cities,
many analysts expect oil prices, and global markets, to remain volatile in the coming days,
even as the opposition in Egypt rallies around Mohamed ElBaradei.
“I would expect regional markets to remain very unsettled because we don’t look any closer to a political resolution than we did last week,”
said Ann Wyman, head of emerging markets research in Europe for Nomura.
“Instability in the Middle East makes global markets uncomfortable.
We’ve entered a new and unpredictable phase of transitioning governments in the Middle East.”
Energy aside, Egypt is a major player in the global grain market, importing more wheat than any other country.
Some analysts have speculated that Egypt and other Middle Eastern grain importers
might significantly increase purchases to placate angry consumers,
which could eventually push wheat prices higher.
Still, a few investors are looking for opportunities in the Middle East and Egypt itself, despite the declines there and the expected instability.
Egyptian stocks are inexpensive compared with shares in other markets, said David Marcus, chief investment officer of Evermore Global Advisors.
“This is one of the oldest economies on earth.”
“We have to start doing our homework,” he added,
noting that another troubled Mediterranean bourse, in Athens, has rallied sharply this year, after Greece’s near-default in 2010.
“Egypt is pulling down the region because people panic and don’t ask questions.
That makes us much more interested,” according to this item in the New York Times.
