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Egypt Erupts: Why Investors Are Keeping Their Cool

Mounting violence in Tahrir Square isn't beating global financial markets into retreat -- yet. Investors outside the Middle East have mostly shrugged off fears that political instability in Egypt could push up the price of oil and, if tensions spread across the region, hurt world economic growth.

Worldwide market capitalization has continued to rise this week, while in the U.S. the Dow Jones is returning to levels last seen before the 2008 collapse of Lehman Brothers. Some hardy investors even sniff opportunity, putting money in an Egyptian exchange-traded fund in expectation that the country's stock market, now closed, will eventually bounce back. Said one U.S. hedge fund executive:

"I'm not selling, and I'm not panicked by these events in Egypt and the Middle East," [Barton] Biggs, 78, who runs New York-based hedge fund Traxis Partners, said in a Bloomberg Television interview on Jan. 31.
For all the dramatic scenes in Egypt, there's reason to think events in the country will have limited impact on the global economy. The country is a small player in oil markets, with a tiny fraction of world crude reserves. Although some European financial firms could have significant exposure there, U.S. banks don't. Egypt's Suez Canal, a major conduit for commodities trade, has remained unaffected by the turmoil. Indeed, the country's economy remains strong, with the growth rate this year forecast to top 5 percent. Perhaps most important, investors seem to be betting that the revolutionary fervor in Tunisia, Egypt and Yemen will not spread to major oil-producing states in the Persian Gulf region.

Crude spike would kill jobs
If such "days of rage" do spread, watch out. Some economists project that a 10 percent jump in oil prices would take 0.25 percent off global GDP growth. In the U.S., every $10.70 increase in the price of oil would raise the cost of gas by 25 cents, according to consulting firm IHS Global Insight. That would hurt employment, stifling the creation of 270,000 jobs over a year if the price hike continued.

"A one-dollar, one-day increase in a barrel of oil takes $12 million out of the U.S. economy," said Jason S. Grumet, president of the Bipartisan Policy Center, a Washington research group. "If tensions in the Mideast cause oil prices to rise by $5 for even just three months, over $5 billion dollars will leave the U.S. economy. Obviously, this is not a strategy for creating new jobs."
Certainly, oil markets are getting jittery at the growing unrest, driving up crude prices. Some energy companies also are withdrawing from Egypt. The question on everyone's mind: Is it headed for an orderly political transition or a brutal crackdown that could fan hostility across the country and the region? Will President Hosni Mubarak bow to growing international pressure to step down, quelling violence and putting the country on a path toward stability? Or will he, like his predecessor, former president Gamal Abdel Nasser, move to consolidate his control of government and the economy?

It's impossible to say for sure. But one thing that could limit the fallout for consumers and businesses around the world are the growing signs that the global economy is, at last, genuinely on the mend. Investors will weigh this evidence in the U.S. -- rising consumer spending, falling jobless claims, robust manufacturing growth, increasing demand for bank credit -- against the growing uncertainty in the Middle East. For now, at least, the markets are keeping their nerve:

"Things are clearly a bit messy, but the market has moved on and said 'There's a solution here, it's just taking time,'" said Oliver Bell, who helps oversee about $10 billion of emerging markets assets as a London-based money manager at Pictet Asset Management.
Let's hope that solution comes soon.


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