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How important is Egypt?

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by Peter Switzer

As I suggested yesterday, market direction will be determined by Egypt, earnings and economics and overnight the latter two forces overshadowed the former. But the question is will this favourable balance for investors last?

After falling 1.4 per cent on Friday, the Dow Jones remained in positive territory driven by good earnings news from ExxonMobil, which had a lot to do with good gas production figures. This should help local energy stocks today.

The Dow ended up 68.23 points or 0.58 per cent to 11,891.93 while the S&P 500 finished 9.78 points or 0.77 per cent higher to 1286.12.

Good economic news

On the economics front, the Chicago Purchasing Managers Index rose to 68.8 in January from 66.8 in the previous month. This measure had good job news in it and is another positive sign for the improving US economy.

Also personal spending was up 0.7 per cent in December, which was better than expected and up big time from the 0.3 per cent increase in November. This reading has gone up six months on a trot.

A Reuters poll of economists had expected spending to be up 0.5 per cent and it’s worth pointing out that personal spending by American consumers accounts for about 70 per cent of GDP in the USA.

Interestingly, personal income rose 0.4 per cent and savings dropped, which is a good sign for the once missing in action US consumer!

New curve ball

But this would be great news if we didn’t have this new curve ball called Egypt. The longer this drags on the worse it could be for markets.

The closure of the Suez Canal is unlikely as it’s controlled by the military, though it cannot be ruled out. A couple of things should be pointed out.

First, Egypt makes about three per cent of its GDP from the Canal and so it’s an important business. And second, most oil doesn’t go through the Suez Canal, as it goes east to Asia.

Some alarmists are talking about country contagion where the Egyptians hate for its leadership will encourage others to play the Muslim card. This looks excessive but if it happened it could really send oil prices up and could create the makings of a global recession.

That’s why we must watch the diplomacy dramas as they play out and from what I am seeing Hilary Clinton, and the Middle East envoy for the UN, US, Russia and the EU, Tony Blair, are both cutting the Egyptians a lot of slack. They also aren’t showing enormous solidarity to the current Egyptian leadership.

As I say, the quicker this is settled, the better it will be for global stock markets.

What’s ahead?

In the US overnight they will get car sales, construction spending and the ISM manufacturing index, as well as earnings from the likes of BP.

In the absence of a surprise development in Egypt our market should be up today.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Tuesday, February 01, 2011