Readings: Impact of Crisis in Middle East and North Africa on Equity and Bond
Markets; Week Ending February 25, 2011
Saudi Stocks Drop to Nine-Month Low, Leading Mideast, on Region's Unrest
Bloomberg. com February 27, 2011
Saudi Arabia’s benchmark stock index plunged to a nine-month low, leading a drop in Middle East
markets, on concern clashes in Libya that caused oil prices to surge to a more than two-year high will
stall a global recovery.
Al-Rajhi Bank, the kingdom’s largest publicly traded lender by market value, dropped 5.2 percent and
Saudi Basic Industries Corp., the world’s largest petrochemicals maker, tumbled to the lowest since
October. Saudi Arabia’s Tadawul All Share Index slid a 10th day, slumping 5 percent to 5,950.64, the
lowest since June 6, at the 3:30 p.m. close in Riyadh. The measure has lost 11 percent since Tunisia’s
former president Zine El Abidine Ben Ali fled the country amid protests that spurred similar uprisings in
nations across the region. About 237 million shares traded on Saudi Arabia’s bourse today, compared
with a one-year daily average of about 137 million.
“With no clear end to the geo-political turmoil in the region, local investors are erring on the side of
caution,” said Amro Halwani, senior equity sales trader at Shuaa Capital PSC in Riyadh. “The regional
uncertainty, with Libya this week’s reason to sell, has pushed fundamentals out of the picture. The surge
in oil is an ongoing threat of a possible derailing in the global economic recovery, and gave investors a
reason to move away from riskier assets.”
Oman’s benchmark MSM 30 Index dropped to 6,458.37, the lowest since September, led by Renaissance
Services SAOG. The provider of services to the oil and gas industry slumped 6.8 percent to 1.085 rials,
the lowest since Dec. 21. In Oman, police fired tear gas at stone-throwing protesters in the industrial city
of Sohar, Reuters reported, citing unidentified witnesses. The protesters were demanding political
reforms, it said. Demonstrations were also taking place in the southern town of Salalah.
Dubai’s DFM General Index fell 0.9 percent. Emaar Properties PJSC, builder of the world’s tallest
skyscraper, dropped to the lowest since February 2010, losing 2.4 percent to 2.85 dirhams. Bahrain’s BB
All Share Index advanced 0.3 percent, while Qatar’s QE Index slipped 0.2 percent. Kuwait’s bourse was
closed for a national holiday.
“We will see heightened volatility until we see a clear resolution to the unrest in the region,” said Omair
Ansari, equity strategist at Gulfmena Alternative Investments in Dubai. “With lack of market
participation by many institutional investors, spikes are occurring on low volumes led by retail.”
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Egypt's Stock Market to Resume Trading on March 1 after One-Month
Shutdown
Bloomberg.com February 27, 2011
Egypt’s stock market will resume trading on March 1 after a suspension of more than a month amid a
popular revolt that toppled President Hosni Mubarak’s 30-year regime.
Prime Minister Ahmed Shafik replaced the head of the Egyptian Financial Supervisory Authority and
approved changes to trading rules aimed at limiting possible losses when the market reopens, the North
African country’s Cabinet said in a statement today. The regulator announced a list of rules on Feb. 19
aimed at managing a possible selloff when trading resumes, including putting in place a 10 percent
circuit breaker on the daily price movement of shares, reducing trading hours by one to three, and
banning margin trading.
Egypt’s benchmark EGX 30 Index of stocks slumped 16 percent in the week that ended Jan. 27, the day it
last opened. “They’re trying to limit the drop as much as possible,” said Mohamed Radwan, head of
international sales at Cairo-based Pharos Holding for Financial Investment. “Investors were frustrated
with the market closure so the resumption is essential.”
S&P 500 Posts Its Biggest Weekly Decline in Three Months
Bloomberg.com February 26, 2011
U.S. stocks fell, driving the Standard & Poor’s 500 Index to the biggest weekly drop in three months, as
Libya’s anti-government uprising pushed oil prices higher and prompted concern economic growth may
falter. The S&P 500 fell 1.7 percent to 1,319.88 this past week, the first drop after three straight weeks
of gains. The index retreated 2.1 percent on Feb. 22, its biggest one-day drop since Aug. 11. The weekly
decline was the largest since a 2.2 percent drop in the five days ended Nov. 12. The Dow Jones Industrial
Average dropped 260.80 points, or 2.1 percent, to 12,130.45.
Stocks slipped as Libyan leader Muammar Qaddafi tried to tighten his grip on Tripoli, sending crude oil
to its biggest weekly gain in two years on concern the turmoil that has cut Libya’s output may spread to
other parts of the Middle East. Oil prices may surge to $220 a barrel if political unrest in North Africa
halts exports from Libya and Algeria, Nomura Holdings Inc. said. Libya, the holder of Africa’s largest oil
reserves, is the latest country in the region to be convulsed by protests ignited by the ouster of Tunisia’s
president last month and energized by the departure of Egypt’s President Hosni Mubarak on Feb. 11.
Oil futures in New York surged to a 29-month high on Feb. 24 amid estimates that Libya’s output was cut
by as much as two- thirds. Oil retreated below $100 after Saudi Arabia, the U.S. and the International
Energy Agency said they can compensate for any Libyan supply disruption and as the U.S. economy grew
less than forecast in the fourth quarter. Crude oil for April delivery settled at $97.88 a barrel on the New
York Mercantile Exchange Feb. 25.
Analysts at Morgan Stanley say sharp increases in oil prices pose the biggest threat to growth because
consumers suffer a sudden hit to purchasing power. They said an 85 percent to 90 percent increase in
the price of oil over a year was followed by U.S. recessions in 1975, 1980, 1990, 2000 and 2008.
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“The events in Libya were the key driver,” said David Joy, chief market strategist at Columbia
Management in Boston, which oversees $327 billion. “Investors are afraid that a tightening of oil
supplies will lead to extraordinarily higher prices, which will divert spending from other parts of the
economy and maybe even force a rethinking of forecasts for global growth going forward.”
Hewlett-Packard Co. and Wal-Mart Stores Inc. lost more than 6.6 percent in the week after their results
missed forecasts. General Electric Co. fell 2.9 percent as industry groups that are more dependent on
economic growth led the declines in the S&P 500. Higher oil prices boosted energy shares, which had
the only gain among 10 S&P 500 groups. Energy shares had the only gain in the S&P 500 among 10
industries, rising 1.1 percent as a group. Chesapeake Energy Corp. advanced the most in the S&P 500,
rallying 16 percent to $35.37.
Chevron Corp., the second-largest U.S. oil company, rose the most in the Dow, climbing 3.4 percent to
$102.10. Exxon Mobil Corp., the largest U.S. oil company, rose the third-most in the benchmark gauge,
increasing 1 percent to $85.34.
European Stocks Post Biggest Weekly Drop Since July; Air France, Eni Slide
Bloomberg.com February 25, 2011
European stocks posted the biggest weekly retreat in seven months, led by declines in airlines and
automakers, as Libya’s violent uprising boosted tension in North Africa and the Middle East and sent oil
soaring.
Air France-KLM Group and Deutsche Lufthansa AG, Europe’s largest carriers, fell more than 4 percent
amid concern the cost of fuel will rise. Oil companies Eni SpA and OMV AG dropped as the revolts
hindered their Libyan operations.
The benchmark Stoxx Europe 600 Index slumped 2.4 percent this past week, the biggest drop since July,
as protests against Libyan leader Muammar Qaddafi threatened to escalate into civil war.
“Investors were pretty scared,” said Arnaud Scarpaci, a fund manager at Agilis Gestion in Paris, which
oversees about $110 million. “This was the first alert to say that 2011 isn’t going to be a smooth,
tranquil river for stocks.”
National benchmark indexes fell in all of Europe’s 18 western markets, except Norway and Denmark.
France’s CAC 40 Index slid 2.1 percent, the U.K.’s FTSE 100 retreated 1.3 percent and Germany’s DAX
tumbled 3.3 percent.
Technical problems forced a 6 1/2-hour delay to the start of trading in Italy on Feb. 22 and a four-hour
shutdown of the London Stock Exchange yesterday.
Air France and Lufthansa lost 4.8 percent and 6.2 percent, respectively. International Consolidated
Airlines Group SA, the parent company of British Airways, slumped 8.9 percent. Travel and leisure shares
posted the worst performance among 19 industry groups in the Stoxx 600, tumbling 5.2 percent.
Eni, the international oil company with the largest presence in Libya, slid 4.4 percent and OMV, central
Europe’s biggest oil company, lost 8.1 percent. On Feb. 22 Eni shut down its Greenstream pipeline that
exports gas from Libya to Sicily. OMV Chief Executive Officer Wolfgang Ruttenstorfer said he expects
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“production will come to a standstill for a certain period of time for safety reasons” in the North African
nation. Carmakers also retreated as oil rose. Bayerische Motoren Werke AG and Daimler AG, the
world’s biggest makers of luxury cars, slumped 3.1 percent and 3 percent, respectively.
U.S. Treasuries Rally Most Since May as Libya Turmoil Spurs Demand for Safety
Bloomberg.com February 26, 2011
U.S. Treasury 10-year notes gained the most in nine months as political turmoil in Libya drove investors
to the safety of U.S. debt and raised concern that surging oil prices may restrain a fledgling economic
recovery. The yield on the 10-year Treasury fell 17 basis points to 3.41 percent, according to BGCantor
Market Data. The weekly yield decline was the largest since May 21, when investors were lured to safe
assets amid concern that euro-zone debt problems spreading.
Yields on the benchmark securities fell for a third week, the longest stretch since October, as Libyan
leader Muammar Qaddafi rallied supporters in the capital, Tripoli, yesterday as opposition forces
consolidated control in the eastern part of the North African country.
“People have translated higher energy costs into concerns about the possibility of an oil shock that will
act as a tax on the economy,” said Russ Certo, a managing director and co-head of rates trading at
Gleacher & Company in New York. Investors want to hold the safest securities “because of the possibility
of getting burned by event risk.”
Longer-term Treasuries have rallied as “each $5 oil rise decreases gross domestic product by 0.2 percent
to 0.3 percent if these higher prices are sustained,” said Guy LeBas, chief fixed-income strategist at
Janney Montgomery Scott LLC in Philadelphia, which manages $12 billion in fixed-income assets. “Over
the weekend liquidity goes away, but event risk doesn’t, so you don’t want to be caught offside, LeBas
said.
“The geopolitical situation is pushing yields down, despite the growth picture holding up,” said Jeffrey
Cleveland, senior economist at Payden & Rygel in Los Angeles, which manages $56 billion.
The difference between rates on 10-year notes and Treasury Inflation Protected Securities, a gauge of
trader expectations for consumer prices over the life of the debt, widened to 2.44 percentage points on
Feb 24, the most since April.
Japan Government Bonds Post Biggest Weekly Gain in 4 Months as Oil Soars on
Turmoil
Bloomberg.com February 25, 2011
Japan’s 10-year bonds completed their biggest weekly gain in four months as speculation higher oil
prices will derail the global economic recovery boosted demand for the relative safety of government
debt. The yield’s weekly drop was the biggest since Oct. 8. It reached 1.22 percent on Feb. 24, the
lowest since Feb. 2.
Benchmark 10-year yields touched a three-week low as an uprising in Libya sent oil to the highest since
2008 and a government report showed Japan’s exports grew at the slowest pace in 14 months. The cost
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to insure Japanese debt against default increased after Moody’s Investors Service cut its outlook for the
nation’s sovereign-debt rating. Moody’s cut its outlook for Japan’s Aa2 credit rating to negative from
stable on Feb. 22, citing the risk the government won’t do enough to tackle the nation’s debt burden.
Five-year credit-default swaps on government bonds rose to 83 basis points, the highest reading since
Jan. 31, according to CMA prices.
“People are buying bonds in part because of speculation a surge in oil prices will cause the economy to
deteriorate,” said Akitsugu Bandou, a senior economist in Tokyo at Okasan Securities Co
The benchmark 10-year yield fell five basis points this week to 1.245 percent as of 4:16 p.m. in Tokyo
yesterday at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.2 percent
security due December 2020 rose 0.434 yen to 99.606 yen. A basis point is 0.01 percentage point.
U.S. Corporate Bond Issuance Drops to 2011 Low amid Middle East Tensions
Bloomberg.com February 25, 2011
U.S. company bond sales tumbled 74 percent this week to the lowest in 2011 as growing tensions in the
Middle East shook markets.
McKesson Corp., the biggest U.S. drug distributor, and Kinder Morgan Energy Partners LP led companies
selling $5.69 billion of debt, the least since the week ended Dec. 31, according to data compiled by
Bloomberg. That compares with $21.8 billion of issuance in the five days ended Feb. 18.
The extra yield investors demand to own corporate debt instead of Treasuries rose this week for the first
time since the five days ended Dec. 3, according to Bank of America Merrill Lynch index data. Spreads
widened 7 basis points to 225 basis points, the data show. Even as spreads widened on corporate bonds,
absolute yields on investment-grade debt continued to decline. The yields fell 9 basis points to 4.06
percent after reaching 4.05 percent on Feb. 22, the lowest this month, Bank of America Merrill Lynch
index data show. Speculative-grade debt yields rose 5 basis points to 7.34 percent after setting a record
low of 7.285 percent on Feb. 22. A basis point is 0.01 percentage point.
“We do have a few issuers who are sitting on the fence and it has definitely to do with the market
uncertainty,” said Timothy Cox, an executive director of debt capital markets at Mizuho Securities USA
in New York. “They’d prefer to issue when the market tone is better rather than try to force a deal in.”
“Fundamentally, it seems that both investment-grade and high-yield are here for a while,” said Ron
Quigley, managing director and head of syndicate global capital markets at Aladdin Capital LLC. “The
events in Africa are a considerable speed bump, and they’ve handled it well.” “Overall, you first have to
address the fact that deals are getting done,” Quigley said. “There is still a considerably large wall of
investor money.”
Issuance will likely increase next week as “the market has a tendency to rebound quickly,” Mizuho’s Cox
said. Uncertainty in the Middle East may even make U.S. markets more attractive, he said. “I really
believe that even if the market remains globally choppy that people will look to the USA and other
developed countries for stability,” Mizuho’s Cox said. “The U.S. certainly looks like a nice place to put
your money these days.”
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