Tax Advice Santa Rosa – UNREST IN EGYPT – What does it mean for the markets?

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Will the Mubarak government be toppled? Egyptians took to the streets in Cairo and other major cities last week, facing riot squads and armored personnel carriers as they demanded political reforms and an end to the 30-year rule of the country’s president, Hosni Mubarak.

The Mubarak government shut down the nation’s internet providers and mobile phone network and imposed a nationwide nightly curfew within a 36-hour period Thursday and Friday. In response, a huge crowd surrounded the Cairo headquarters of Mubarak’s National Democratic Party (which was set on fire) and the nation’s key radio and television headquarters. Great Britain’s Telegraph reported that 870 in the crowd suffered injuries, with some protestors being shot.1

How did the markets interpret the turmoil? The reaction was as expected: stocks dived, oil and gold prices immediately climbed and there was renewed interest in the dollar and U.S. government bonds.

Gold gained $22.30 (1.69%) on the COMEX, while oil rose $3.70 (4.32%) on the NYMEX. At the end of the U.S. trading day, gold settled at $1,340.70 per ounce and oil had topped $89 per barrel ($89.34). The U.S. Dollar Index moved north 0.55% on the day.2,3

The Dow, NASDAQ and S&P 500 all tumbled Friday, though the descent also reflected disappointment over earnings reports from Ford and Amazon. On the day, the Dow fell 166.13, the S&P slipped 23.20 and the NASDAQ dropped 68.39.4

Basically, this is putting Europe on the back burner. For about a year, Wall Street has been watching the sovereign debt crisis in the EU. Now the focus shifts, or at least is split.

What if the Suez Canal is shut down? The possibility has come up given the level of Egypt’s unrest. It wouldn’t be just oil prices that would suddenly spike. Prices of other hard assets could rise as well, because the canal is a vital shipping channel for many other raw materials. Fear was back Friday: the CBOE VIX, the so-called “fear index”, was up 23.30 and hit an intraday high unseen since December 2.4

Was this simply the cue Wall Street had been looking for? There was the sense recently that stocks had been overbought, that some kind of selloff was coming. (After all, the Dow had been on an eight-week winning streak.) Friday’s events may have given institutional investors the sell signal they were waiting on – volume was considerable on Wall Street during the trading day.

Is this an isolated geopolitical event, or a spark? That, perhaps, is Wall Street’s biggest worry. Many observers think the demonstrations and unrest in Egypt were directly inspired by earlier protests in Tunisia and Lebanon. The big question is whether that inspiration will now spread to other Middle East nations with authoritarian governments, such as Yemen and Saudi Arabia. The upcoming weeks promise to be very interesting on Wall Street.

Your personal financial consultant – Monty

(707) 576-8700