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London - Egyptian financial markets plunged on Wednesday with the currency tumbling to near six-year lows a day after fierce anti-government protests, though broader emerging equities firmed due to a brighter global economic outlook.
Egyptian stocks fell 5.7% to the lowest since August 2010, while debt insurance costs hit new 18-month highs, though relative calm had returned to the streets of Cairo following country-wide demonstrations calling for the end of 82-year old President Hosni Mubarak's 30-year rule.
According to Markit data, Egyptian credit default swaps rose 11 basis points to 345 bps, after jumping more than 20 bps in the previous session.
"We downgraded Egypt to neutral from overweight last week but in retrospect, underweight would not have been a bad idea" said Robert Ruttman, emerging equity strategist at Credit Suisse in Zurich.
"Longer-term these are the growing pains of evolution to democracy in North Africa. But short term it won't be pretty."
Egypt's stock market has lost more than 11% since the start of the year, while the pound is down 0.4% due to knock-on effects of the protests in Tunisia that ended the 23-year rule of President Zine al-Abidine Ben Ali.
Analysts expect more weakness ahead for the financial markets - Citi director for CEEMEA debt and FX strategy Luis Costa said Citi had observed ouflows of $150m at least from the Egyptian local bond markets on Wednesday, which had helped push the pound down.
Egypt is one of only three African markets included in the MSCI emerging benchmark index but comprises only 0.45% of it. Emerging equities broadly and even Gulf stock markets appeared little affected as yet by the Egyptian rout, with the index up 0.6%.
Instead, investors were focusing on US President Barack Obama's promise to cut spending in a late Tuesday speech, which also proposed some corporate tax cuts. Stock markets have risen in response, reckoning that the Fed will continue with its ultra-loose policy well into 2011.
Markets are now waiting for the US central bank's latest policy decision, due at 1915 GMT.
Central European stocks were up 0.2% but Moscow gained 1.4% thanks to an oil price rebound while Johannesburg also rose over 1%.
But emerging stocks with losses of 0.6% this year, are starting to lag global peers, which are up 2.3%.
While inflation and rate rise fears in developing countries are partly to blame, Arvid Bohm, equity strategist at SEB in Stockholm says the main reason is the greater optimism on the developed world, especially the United States.
"There is a greater strength in the business cycle recovery and that is encouraging investors to look for other markets to put their money," Bohm said.
In Turkey, stocks rose 0.8% while bonds were flat. Yields rose on Tuesday when the central bank raised its 2011 inflation forecast and committed to more policy tightening after it raised reserve requirements further this week.
But analysts said the new forecasts and the implications for monetary policy to some extent reduced uncertainties caused by two successive surprise rate cuts recently. Those cuts significantly steepened Turkey's rate curve.
"The spelled-out tightening carried out so far and to come are likely to create more confidence in lira. But overall we don't expect the pressure on lira to ease too much. So levels below 1.50 in dollar/lira...are still unlikely in our view," ING analysts said in a note.
Sovereign emerging debt spreads tightened by 9 basis points over firm US Treasuries.
