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Feb 01, 2011, 11.23 AM IST | Source: CNBC-TV18

Egypt crisis: How bad could things get?

Oil prices, which rose to levels just short of 100 dollars a barrel on Friday, are holding firm as protests against Egyptian president Hosni Mubarak's regime enter the seventh day.

Nouriel Roubini, RCE Monitor

Oil prices, which rose to levels just short of 100 dollars a barrel on Friday, are holding firm as protests against Egyptian president Hosni Mubarak's regime enter the seventh day.

All eyes are on how the geo-political tensions in Egypt unfold and analysts say oil prices could breach 100 dollars if the tensions continue, or spread to other nations in the Middle East. Traders worry that the protests could lead to a shutdown of operations at the Suez Canal, which is a key transport link for oil containers to and from the Mediterranean.

According to Nouriel Roubini of RCE Monitor geo-political risks are on the rise. “There is already political contagion from Tunisia to Egypt. There have been demonstrations in other parts of the Middle East. There could be other autocratic regimes under threat of being toppled. So geopolitical risk is on the rise; oil prices are rising to almost USD 100 per barrel (bbl); risk aversion is higher; equity markets around the world are responding negatively and increase in oil prices increase further inflation in emerging markets. There is tax on income in advanced economies, so it has a negative effect on growth, while rising inflation—all this is not very good.”

He further added, “Even if in the past global recession has been associated with oil price shocks, driven by geopolitical shocks. We are not yet at that stage of geopolitical risk, if you had a collapse in the Middle East, you had radical regimes coming to power, then oil prices will go much higher, and it could have another stagflationary shock. We are not yet there but certainly rising oil prices and greater risk aversion is overall a negative for the markets and for the economies.”

Barry Knapp of Barclays PLC felt tail risk of Egypt crisis is a key issue. “If this rolls into Saudi Arabia and that sort of thing, you have a much worse scenario but Egypt's a net importer of oil and there is the Suez Canal risk, but when you go through all these things, you do wind up with it being a fairly low probability outcome that it causes a major supply based price shock in energy that in turn impacts consumption in the US and really rolls into a much bigger problem

He further said, “This looks like such a tail risk that it develops into a major supply shock, and in turn impairs thier macro recovery, that you wind up thinking Friday's payroll data is probably far more imo than the Egypt situation in the near term.”

Echoing Knapp’s view that US economic data more significant than Egypt crisis, James Paulsen of Wells Capital Management said, “Maybe it hasn’t had more short-term impact, just because we had a market that is vulnerable. We have a market that’s up almost 30% the last 3-4 months. The mindset of investors is that we know a consolidation period is coming; we know a correction is going to occur at some point, and here we have this catalyst front and centre and the worst is done—it’s is 2% off the top. I could see where there could be more selling pressure, just on a technical basis, using this as a short-term selling catalyst but at the end of the day as the week wears on, you got to ask yourself as an investor, ‘Am I going to go short on the low probability that this blows into something major, and I am going to be facing ADP Wednesday, claims Thursday, and payroll Friday, which could be much more significant for the direction of the economic cycle as well as the market place.”

Meanwhile, Jeffrey Saut of Raymond James believed, "It's going to take more than protest in Egypt to break the back at the uptrend. I came into the year looking at some kind of pullback. So far that has been wrong footed. But we haven’t really extended very far above the first day at the year when the S&P gained 14 points. So I am still looking for pullback. I am still looking for it to be less than 10%. I am looking to put money to work in that pullback. I think the Egyptian thing will go away."

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