Shock waves from Egypt reach the US
January 31, 2011
The Dow Jones fell 166 points on Friday, primarily due to uncertainty caused by the unrest in Egypt. However, this might say as much about the risk of the U.S. market as it does about the impact of a potential change in Egypt's leadership.
The scent of jasmine
Tunisia's "Jasmine Revolution" has inspired a boiling over of long-simmering popular dissatisfaction with Egypt's dictator, Hosni Mubarak.
As appealing as the idea of getting rid of a dictator might be to American democratic sentiments, it remains to be seen whether Egypt's revolution will lead to democracy, or whether it will be like Iran in 1979, when a secular dictator gave way to anti-Western religious extremists. The anxiety over this situation is amplified by the fact that the pattern could be repeated in other Middle-Eastern countries. In this era when news spreads quickly over the internet, revolution may be about to go viral.
In economic terms, concerns about the Middle-East naturally center on oil. Sure enough, oil prices were up Friday, but not outrageously so, and not enough to take oil out of the range it has been trading in recently. The hit to stocks reflects the fact that with a fragile economic recovery underway, the stock market is not in a good position to withstand shocks.
Potential threats to savings and money market rates
- Any inflationary impact or disruption in the oil supply would be especially hard on depositors with CD, savings, and money market rates so low.
- If these disruptions act as a drag on the economy, it could work to keep low interest rate policies in place even longer.
For now, though, it's important to remember that nothing has happened yet that would actually interrupt the flow of oil. What's going on now is a reminder that markets hate uncertainty. There's a good chance that these next few days of not knowing what will happen will be more disruptive to the financial markets than the eventual outcome.