The Middle Eastern stock markets have taken a serious turn for the worse since the beginning of the year. As of yet, it’s difficult to forecast problems in US markets based on declines in Middle Eastern stocks. However, these markets are worth keeping an eye on because, historically, foreign markets have turned down in advance of the US markets. And given the interconnected nature of financial world, investors should always be on alert for serious declines in any foreign stocks.
Several of the Middle Eastern stock exchanges – Dubai, Kuwait, Jordan and Saudi Arabia – all topped out in the latter part of 2005. For instance, the Dubai Financial Index topped out at 1,200 after a two year run from 200…
Source: Bloomberg
And the Kuwait exchange recently formed a double top as well…
Source: Bloomberg
Obviously, many of the Middle Eastern exchanges are directly correlated to the price of oil. The Kuwait exchange, for instance, correlates almost exactly with the price of oil.
Source: Bloomberg
However, the more liquid United Arab Emirates Dubai Financial Index has far surpassed the price of oil in terms of appreciation. The United Arab Emirates is a safe haven for capital and commerce in the Middle East, which makes the decline even more concerning. Right now, it looks like a financial bubble that has burst.
Source: Bloomberg
Of course, the stock indexes of the Persian Gulf monarchies might have absolutely no relevance to the US markets. Other stock exchange indexes of the region, such as Israel and Egypt, are still doing fine. The Egyptian Hermes index has just recently corrected after an impressive run…
Source: Bloomberg
However, as John Maudlin writes in this week’s "Thoughts From The Frontline,"
…everything is more connected than ever. If the Chinese and Japanese buy fewer dollars and US bonds, interest rates rise and the dollar falls which slows our economy and we can buy less of their stuff which slows them down and they buy less from Asia which slows their economies which affects the price of oil and commodities which (on and on). Everything is connected. It is a spider web of fingers of instability.
In a global world we have seen that things which did not correlate in the past can do so, and very quickly. The problem is that we cannot see the fingers of instability, the hidden connections, until the avalanche has started. So we have to pay attention.
The United Arab Emirates Dubai Financial Index might have nothing to do with the US markets, or it might lead to a similar chain reaction which forced the collapse of Long Term Capital Management in 1998. Who knew in 1998 that a Russian bond default and a currency crisis in Thailand could have such a dramatic effect on the world’s financial markets? This is what those two stock markets looked like in 1997 and 1998, before the problems ever surfaced in the US in August of 1998. Russia topped out long before 1998 even started…
Source: Bloomberg
And the Thailand SET index had been in a multi year correction already, similar to most Asian markets of the time. The events of 1998 actually marked the bottom for that stock index…
Source: Bloomberg
So while it’s difficult to know what ripples a burst financial bubble in the Middle East could have on the world’s markets, we have to pay attention, just as John Maudlin counsels.