The political turmoil being played in the streets of Cairo also is being played out on Wall Street.
At the beginning of the U.S. market trading session on Monday, shares of the Market Vectors Egypt Index (NYSE: EGPT) exchange-traded fund were halted. According to the official statement by asset management firm Van Eck Global, which issued EGPT, the firm “will exercise its right to suspend creation orders of Market Vectors Egypt Index ETF. This follows the firm’s normal policy of suspending creation orders when the underlying market is closed for an extended period thereby helping to prevent the costs of creation activity to be borne by existing shareholders.”
Translation, no more buying allowed in EGPT.
The Egyptian stock market remained closed for a second straight day on Monday, and most banks were shut as anti-government protests seeking the ouster of President Hosni Mubarek entered a second straight week.
Van Eck Global did say it would accept redemption orders in conjunction with the terms described in its prospectus, and those orders will be executed once trading in EGPT resumes, which is expected when the Egyptian market reopens.
We’ve already seen big selling volume in the Market Vectors Egypt Index since the beginning of that nation’s social unrest some two weeks ago. In the chart below of EGPT, which shows action over the past month, we see the steep selloff that’s occurred since Jan. 15. The fund plunged below both the short-term, 50-day moving average as well as the long-term, 200-day moving average in a matter of just a couple of trading sessions.
Adding insult to injury for the Egyptian markets was the decision by Moody’s on Monday to downgrade Egypt’s government bond ratings in the faced of the political turmoil. The ratings agency slashed the country’s credit rating to Ba2 from Ba1, and changed its outlook to negative from stable.
The downgrade of Egypt’s credit rating forced the cost of insuring Egyptian government debt against default higher as well, with spreads on five-year credit default swaps widening to 450 basis points from 428 on Friday. According to Moody’s official statement, “Today’s rating action was prompted by the recent significant rise in political event risk and concern that the policy response could undermine Egypt’s already weak public finances.”
The real fear out there in the markets is the possible spreading of weakness to the wider emerging markets. Last week, stocks in the broad-based iShares MSCI Emerging Markets (NYSE: EEM) ETF fell nearly 2.5% as fears that Egypt’s unrest would prompt even more selling in the sector. However, midway through Monday’s trade EEM was up over 1%, so the ongoing turmoil Egypt hasn’t yet caused a run for the exits in the broader emerging market space.
At the time of publication, Jim Woods had no positions in the stocks or funds mentioned here.