Egyptian stocks posted their biggest gains in more than a year and the benchmark bond yield tumbled the most on record following the dramatic ousting of the country’s first Islamist president.
The EGX 30, Egypt’s benchmark equity index, rose 7.3 per cent, the largest increase since June 2012, with several companies jumping the maximum 10 per cent. The yield of the benchmark international bond maturing in 2020 slumped 134 basis points to 9.1 per cent, after reaching a record high during the tense days ahead of last weekend.
“The market is rallying hard, driven by predominantly domestic investors in a celebratory mood consequent to Morsi’s departure,” said Julian Bruce, the Dubai-based head of institutional trading at Egypt’s EFG-Hermes Holding. “Concern over what happens in the medium term is being put aside for another day.”
On Wednesday General Abdel Fattah al-Sisi, the country’s defence minister, suspended the constitution and announced that the head of the Supreme Court would be sworn in as president, ending the rule of Mohamed Morsi.
The ousting of Mr Morsi – who was elected only a year ago – underscored a return of the military’s role at the centre of Egypt’s politics. It also played a decisive part in the overthrow of the country’s former president Hosni Mubarak in 2011.
With US markets closed on Thursday for the July 4 holiday, traders are expecting a knock-on effect with lighter volumes across the region.
While the short-term market reaction was positive, broader concerns remain about Egypt’s debt pile – and its dwindling reserves. Bank of America Merrill Lynch estimates $33bn in gross financing needs over the next 18 months.
“In the absence of fresh Arab aid, we think Egypt has six months before the external position tightens markedly again,” the US bank’s analysts warned in a note.
Egypt has yet to sign a $4.8bn loan deal with the International Monetary Fund, an important lifeline that foreign investors are watching closely. Nonetheless, the cost of insuring against an Egyptian default fell 118 bp to 787 bp, according to CMA, the lowest since June 20.
International equity fund managers will also be watching the next move from MSCI – a leading index provider – that threatened to downgrade Egypt from its emerging market benchmark in its review last month.
In March, as political tensions rose, Moody’s Investors Service cut Egypt’s credit rating to Caa1, deep into junk territory.
The response of regional stock markets in the Gulf was muted in early trading, with most trading a little higher, but some fund managers are watching for any signs of Egypt’s political turmoil spilling over into the wider region – the world’s biggest source of oil.
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