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Regional stock market sell-offs just the start as Israel ramps up its military ready for a strike on Iran

Posted on 19 November 2012 with no comments from readers

Stock markets fell across the Middle East yesterday as investors digested the likely impact of an Israeli military operation in Gaza that looks like the opening shots in a campaign to prepare the ground for a strike on Iranian nuclear facilities.

Military strategists said that Israel intended to destroy missiles in Gaza that are now fired daily at the country. But the current air raids are expected to be followed by a military invasion. Analysts think the same will then follow in southern Lebanon against Hezbollah, and that after or during this operation Israel will make an aerial strike on Iran, possibly as soon as January.

Cairo falls

In Cairo the stock exchange index plunged three per cent yesterday in an indiscriminate attack on share prices. Only last week the European Union agreed a $6.2 billion aid package for Egypt and a $4.8 billion IMF facility is under discussion.

President Morsi has promised to maintain the Egyptian peace treaty with Israel but clearly that may come under strain in these circumstances. Egypt has already withdrawn its ambassador to Israel and convened an emergency meeting of the Arab League. At the very least there is the threat of more internal insurrection.

But countries far away from Israel in the Gulf States – a similar distance to that between London and Moscow – also saw investors react negatively. The Dubai Financial Market dropped by the most at 0.9 per cent while the Saudi Tadawul was down 0.4 per cent.

These nations are exposed if Iran were to attempt to carry out its threat to close the Strait of Hormuz, though oil prices would also rocket. The UAE has recently commissioned a pipeline bypassing the Strait and Saudi Arabia has some capacity to do the same. The US Navy has said it would not allow the closure of the Strait and has utterly incredible fire power. Most of the Iranian miliary machine could be destroyed in hours.

Unless Iran rapidly backs down this is a crisis set to escalate and rather quickly over the next two months. There is no sign of that happening. Indeed, Iran’s response has been to double up on its nuclear program in defiance of Isreali actions and the economic strangulation of trade sanctions.

As ArabianMoney explained last week in the run-up to major military conflicts it is usual for stock markets to continue to sell off and to discount the worst possible outcome. Fear breeds speculation about the worst possible scenario.

Second Gulf War

That is why the dot-com crash bottomed out in March 2003 just before the Second Gulf War. Markets then hit a bottom because people really thought Saddam Hussein might have tactical nuclear weapons or something equally nasty in conventional weaponry. In the event he proved a bag of hot air and a complete pushover for the US-led military.

Would Iran prove to be the same in a showdown with Israel? That must be the Isreali gamble, or is Iran setting a trap? You never know of course and stock markets will plunge as the uncertainty rises and the speculation grows more intense.

Only when the truth is known for sure would markets rebound if things are not as bad as feared, or fall a lot further if the reality proved even worse than imagined. Stock markets hate uncertainty and only reach a bottom when they have it fully discounted. We seem a long way from that point today.

The next issue of the ArabianMoney investment newsletter (subscribe here) will discuss the implications for local and global investors in more depth.

Posted on 19 November 2012 Categories: Banking & Finance, Bond Markets, GCC Economics, GCC Real Estate, GCC Stock Markets, Global Economics, Private Equity, US Stocks

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