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Why the new crisis in Egypt is a black swan for financial markets

Posted on 03 July 2013 with 1 comment from readers

Global stocks continued to plunge in the advance of a climax in the power struggle in Egypt with a military coup seemingly just hours away. Gold, oil and silver prices strengthened.

Is this the black swan event that will trigger a wider correction in global financial markets? Many commentators have been looking for a catalyst to bring an over-extended rally to an end. Perhaps this is it.

Oil prices jump

Oil prices are the most common of black swan factors. Recall how quickly $147 a barrel in July 2008 brought global financial markets tumbling down.

Just how would Egypt impact on oil prices? It’s not a major oil producer, far from it, though 2.4 million barrels per day passes through the Suez Canal. Egypt is also the third largest Middle East economy and its most populous nation. What we are witnessing is a new twist in the ongoing saga of the Arab Spring.

Did ArabianMoney not think two years back that revolution would come back full circle to a military dictatorship? (click here) The problem is that imposing such a solution would mean a civil war. We already have one civil war in the region in Syria which is destabilizing its neighbors.

Egypt is another reminder that the Arab Spring instability is far from over. We’ve even seen the sentencing this week of those involved in an Islamist plot against the UAE rulers. The last thing we need is more instability in the region.

Iran’s reaction?

Those hoping for a change with a new reformist president of Iran could find their optimism dashed by geopolitical realities. Egypt’s President Mohamed Mursi is an ally and Iran will not be happy to standby and watch his demise.

If nothing else this all adds to uncertainty in an volatile and unstable area of the world that still produces 60 per cent of global energy. Higher oil and gas prices are inevitable in the circumstances that will remain unpredictable, chaotic and anarchic in character.

Financial markets hate uncertainty and should therefore be expected to resume their recent sell-off. Even a successful military coup in Egypt would only be another stage in the revolutionary chaos of the Arab Spring with extremely unpredictable long-term consequences.

Still we expect multiple black swans to emerge this summer. Another today is Portugal’s spike in bond rates above eight per cent and a six per cent crash in its stock market. China’s economic hard landing is perhaps the biggest black swan of them all.

Posted on 03 July 2013 Categories: Banking & Finance, Bond Markets, GCC Economics, GCC Real Estate, GCC Stock Markets, Global Economics, Oil & Gas, Sovereign Wealth Funds, US Dollar, US Stocks

1 Comment posted by readers:

Comment by desert dream - 04 July 2013

Spot on! Yes it looks like choppy waters. Splendid article.

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