Photo: Courtesy of @monasosh
NEW YORK (TheStreet — “All the trading on Egypt happened last week,” says Ben Willis of Sunrise Securities.That may be true for the stock jocks, but the Egyptian crisis is still rippling through the broad market. Professor Simon Johnson of MIT notes that the focus on Egypt has actually taken some of the pressure off of Europe. Indeed, Germany reported on Monday that its retail sales dropped unexpectedly in December, sparking worries over too much tightening hurting growth. But the European markets showed resilience as Italy’s business confidence improved more than expected.
The Asian markets seem to be taking the brunt of the Egyptian worries. Both the Indian BSE Sensex 30 Index and the Philippine SE Index fell sharply. Professor Johnson says that for now the crisis does not look catastrophic as “Egypt is not that big a part of the global economy.”
However he notes that the Suez Canal is an issue as far as oil and shipping are concerned. Moody’s Investor Services cut the rating on Egypt’s sovereign debt to negative as a result of the protests. Fitch also dropped its opinion on Egypt to negative from stable.
Jason Pride, Director of Investment Strategy at Glenmede Wealth Management said “Geopolitical risk has historically led to temporary market weakness and that creates an opportunity for buyers.” The key areas in the market that Egyptian turmoil is affecting are energy, gold, shipping, defence and commodities.
Photo: ezioman via Flickr
Oil was the most affected piece of the market as a result of the uprising. Brent crude oil futures jumped over $100 a barrel for the first time in 28 months. The last time crude hit $100 a barrel was on Oct. 1, 2008.The concern is getting oil shipped through the Suez Canal. Traders worry that instability in Egypt will spill over to other Middle Eastern countries and disrupt the flow of oil out of the region. According to the U.S. Energy Information Administration, Egypt has the largest oil refining industry in Africa and Egypt’s Sumed Pipeline also provides a pipeline network for exports to Europe .
Apache Oil(APA ) has 25% exposure to Egypt. Real Money contributor Dan Dicker believes that if an investor has the risk tolerance — Apache could present an opportunity. He is clear that risks abound, i.e. a new government might not feel obligated to meet previous contractual responsibilities to Western companies. He feels a rebound in the stock from last week’s panic and stability in the trading could present a buying opportunity.
Another dynamic in the energy sector is M&A activity. Chinese offshore oil producer CNOOC(CEO ) agreed to a $1.3 billion deal with Chesapeake(CHK ), continuing its aggressive drive for acquisitions. Further driving up the price of oil and oil companies.
Gold initially jumped on Friday due to the results, climbing 1.7%. But the panic seems to be dissipating as investors are becoming more comfortable with the crisis. Gold had already pulled back 7.5% in 2011 and the quick move on Friday created a exit point for many gold traders.TheStreet’s Alix Steel reported that many gold traders felt that gold had already bottomed out naturally and the uprising was a good reason to buy. The “flight to safety” argument could continue to play out if Egyptian banks run out of cash or if Egyptians need to resort to gold as a form of crisis currency.
The Egyptian central bank recommended that banks close branches on Monday. Citigroup(C ), Barclays(BCS ) and HCBS(HBC ) all reported they had evacuated small numbers of employees, but none reported shortages of cash.
ATM machines were reportedly running out of cash and there is concern that when the banks do open, there could be an overwhelming amount of customers emptying their accounts. Bloomberg though quoted Mohamed Barakat, chairman of state-run Banque Misr and head of the country’s banking association, said in a telephone interview that Egyptian lenders are “very liquid,” with average loan-to-deposit ratios of 53 per cent.
Initially the market believed the political uprising could force a closure of the Suez Canal.Those fears seem to be abating but shipping stocks saw a lift on Friday as traders jumped on board with the theory. Kirby(KEX ) popped 12% in two days. Frontline(FRO ), the world’s largest operator of supertankers saw its stock climb 8.5% on Friday. Nordic American Tankers (NAT ) also jumped on Friday.
But TheStreet’s Scott Eden reports most of the tanker stocks are already giving back those quick gains.
Like those tanks you see trying to control the crowds of protestors? They are mostly made in America. The United States gives $1.3 billion in military aid to Egypt each year, and the country uses those monies to purchase a number of products manufactured stateside.
Aside from its purchasing power, Egypt gets the Pentagon’s extras. The market doesn’t seem to be concerned that these U.S. weapons could end up with an unfriendly government regime, which happened in Afghanistan.
There also doesn’t seem to be much concern that a new government might not be so willing to work with Washington. We give them — not loan — give them money to buy our military weapons. Heck of a deal. So, the defence sector bears watching amid all this turmoil.
When one thinks of Egyptian products, Pima cotton comes to mind.
“You know the kind that makes you feel like you’re sleeping on butter,” says Suzanne Johnson of First Capital Group. But she says that Egypt is a small producer in the big scheme of things. “If it were India, maybe I’d be concerned,” said Johnson. So cotton should not be affected by this.
However, wheat prices are falling on the political unrest. According to the U.S. Commercial Service, Egypt is one of the world’s largest consumers of wheat and a key market for U.S. wheat farmers.
The U.S. wheat, corn and soybean market is roughly $2 billion a year, and wheat has already fallen 2.4% on fears of less purchasing. That isn’t expected to last for long.
While in the near term there may not be a governmental mechanism to purchase wheat, it’s expected that eventually people will need the grain and the market will open back up. Archer Daniels Midland(ADM ) was trading up on Monday, whereas ConAgra (CAG ) was off slightly.
This post originally appeared at TheStreet.com.
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