Middle East turmoil impacts regional indexes

Saturday usually marks the start of the GCC trading week when Saudi Arabia's Tadawul market opens. On February 26 things were different. On the occasion of the return of King Abdullah from medical treatment in the US and Morocco, the

Tadawul bourse remained closed for one day. Usually the other GCC markets correlate highly with the Tadawul's benchmark index TASI, which is down 5.39% so far this year.

This rule of thumb still holds. Year-to-date (as of the close of trading of February 24th), all GCC markets have lost heavily, with the exception of the Bahrain Bourse. The Dubai Financial Market (DFM) posted the largest decline during the same period, losing 9.26% at 1,479.61, a six-month low.

The DFM is followed by Kuwait (off 6.82% at 6,481.10) and the 2010-highflyer Qatar (down 5.42% at 8,211.27). Traders can only generate profits with derivatives. Put options and short futures, for example, enable investors to gain when prices fall. The NASDAQ Dubai's derivatives segment offers a good range of such instruments which can be used for speculation and hedging strategies.

Indexes fall despite high oil price

With oil trading at a thirty-month high, one might ask why GGC markets plummet on turmoil which is not even taking place in their countries, with the exception of intensive, but limited clashes in Bahrain. Algeria, Libya and Yemen do not even run stock markets.

The rule that stock indices surge when energy prices climb has clearly been broken, so far. "As foreign companies pull out workers from Libya, the risk is that significantly more production will be shut down in the days to come, " says Farouk Soussa, Chief Economist at Citi in Dubai.

The GCC is much too connected with the world to benefit from the energy price rally. Higher oil prices mean higher costs for airline tickets, putting pressure on the region's tourism sector. Rising costs of transports lead to higher food prices, as the UAE, for example, imports 90% of its food consumption.

All eyes on Saudi Arabia

Now, all eyes are on Saudi Arabia, to see whether the kingdom will really increase its production to offset the Libyan losses. "Saudi Arabia has up to 4 million barrels per day in spare capacity, more than the entire production, let alone exports, of Libya and Algeria (and Bahrain, for that matter) combined," Soussa explains.

Another rule that is being broken is the old traders' advice to "buy when markets are low". "Valuations at Gulf Arab markets are cheap, no doubt about that, but we advise our clients to be very cautious," says Mark McFarland, Emerging Market Economist at bank Emirates NBD says.

When Egypt closed the stock market in Cairo, markets fell and it was hoped that the market shock would be short lived. But markets fell further.

The current scenario of domino-riots in key OPEC states, rising inflation and falling asset prices leaves investors puzzled. "We recommend a switch from equities to investment grade sovereign bonds," McFarland told AMEinfo.com.

The inflationary environment led by commodity price-rallies and the easing monetary policy of Western central banks will inevitably lead to interest rate hikes. At the 2011 Fund's Conference in Zurich in mid-February, investment legend Jim Rogers told at an event organized by RBS Coutts Bank that he cannot exclude the possibility of interest rates rising to the level of 18% like in the 1970s.