Stock markets slide amid Iraq violence

18 June 2014

Stock markets drop up to 7 per cent in three days

Regional stock and bond markets have dropped as militants from the Islamic State in Iraq and Syria (Isis) continue their advance across Iraq.

Following the outbreak of the conflict in the country, fears over oil supply interruptions and the possible spread of violence have caused investors to sell off regional stocks.

Stock markets fell 1-7 per cent between 15 and 17 June, with Dubai leading the sell-offs. With the exception of Egypt and Oman, the markets decreased up to 12 per cent month-to-date.

“The Iraq situation is causing a flight to safety in regional markets, with investors now having more reason to sit on the sidelines during the summer months and Ramadan,” said Dubai-based brokerage firm Al-Masah Capital in a 17 June report.

“The largest effect has been on the Saudi market, which dropped 2 per cent on Monday, which is huge for them. In Dubai, the effect was less pronounced – it started with profit taking, then the UAE’s central bank financial stability report showing there are some unbalances in the real estate market and rumours surrounding Arabtec, and finally the fears of the Iraq conflict affected the market. But for the moment, things have calmed down,” says Abdelbasset Ben Hnia, risk officer at Dubai-based Quantum Investment Bank.

The prospect of increasing violence in Iraq has also affected the Iraqi bond market, although Turker Hamzaoglu, a London-based analyst at the US’ Bank of America Merrill Lynch, says in an 18 June report that fears may be overblown.

“Considering the sharp fall in Iraqi dollar bond prices, circa 5 points, we believe the sharp negative market reaction is likely to prove exaggerated,” he notes.

“It’s obvious that Isis has benefited from the vacuum of power in Iraq and the fragmented nature of the Iraqi army. But don’t get the wrong idea from the headlines that Iraq is crumbling and fanatic jihadists are taking control. We may see some rapprochement of a strange kind for Iraq between secular Sunnis, Shia Arabs, Kurds, Iranians and Turks soon to reverse Isis’ offensive and use it as a lever for domestic politics.”

The price of the UAE’s Dana Gas’ sukuk maturing in 2017 fell nearly 7 per cent on 16 June before rebounding just 3 per cent on 17 June. The firm receives about half of its revenues from the semi-autonomous Kurdistan region of Iraq, although it said in a statement that its operations there have not been affected.

Other regional bond and sukuk markets have also dropped slightly, although these are mainly caused by their links to the US dollar, according to Ben Hnia.

Stronger than expected US economic data has caused treasury rates to increase by 15 basis points amid expectations that Washington may decide to raise interest rates in the near future, immediately affecting regional dollar-denominated bonds and sukuk, or securities denominated in a currency pegged to the dollar, as well.

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