Business Week Writes: Egypt’s Markets Are Strangely Stable
More than 1,000 people have died in Egypt in the past six days, but you’d never know it to look at the Egyptian stock market. Since June 30, the first day of mass protests that contributed to the downfall of President Mohamed Mursi, the country’s two main stock market indexes are up 12 percent.
Not only that, but the rates the Egyptian government has to pay to attract buyers for its bonds have fallen slightly—a sign that global investors aren’t panicking and demanding higher yields. The yield on one-year government bills today was 12.9 percent, down from 14.9 percent in late June.
Pretty surprising considering that much of the nation is paralyzed by a violent confrontation between the military-backed government and supporters of the deposed Islamist president.
This is another perfect example of why most people have a wrong understanding of how the stock market works. Most people believe that news and events drive stock market and individual stock prices up or down. However, quite the opposite is true.
For example, if we look at the situation in Egypt today based on the news reports we would assume that Egypt is on the brink of a civil war and as such their stock market values and their currency should be collapsing while their bond yields should be surging. Yet, quite the opposite is true.
Stock prices predict the future, not react to existing news or events. Typically the values you see today predict a couple of months (sometimes years) into the future. While news events do have a hand in changing values on short term basis, their overall impact is minuscule.
So, will there be a civil war in Egypt? The stock market sends us a clear answer at least for now….NO AND THINGS ARE ABOUT TO STABILIZE.