Investors are expected to be keeping a close eye on developments in the euro zone this week as the continent's debt crisis continues.
Regional market watchers are particularly keen to determine the impact of the trouble in Europe on Egypt and Tunisia, both of which have been hit hard by political turmoil, said Capital Economics, a research house in London.
"Euro-zone worries will increase pressure on the economies of Egypt and Tunisia," said Said Hirsh, an economist at Capital Economics. "The EU is the major trading partner for both countries, but of the two, Tunisia is more at risk."
The delicate state of parts of the European economy was evident on Friday as Moody's Investors Service changed its outlook on 13 mid-sized and smaller Italian banks to negative and warned it could downgrade the long-term debt ratings of 16 others. This action followed its announcement last week that it had put Italy's debt on review for possible downgrade. Egypt's benchmark index declined 1.1 per cent to 5,479.60 last week, while Tunisia's index rose 1.5 per cent to 4,297.53.
Tunisia is more vulnerable in that it relies more on exports, which accounted for more than 34 per cent of GDP last year. By contrast, Egypt's exports amounted to less than 12 per cent of GDP. While the EU is the biggest export market for both countries, it is much more dominant for Tunisia. Exports to the EU amount to 25 per cent of Tunisia's GDP, but only 4 per cent of Egypt's. "To get a sense of the potential impact of the economic slowdown in the EU, we only need to look back to when the global financial crisis hit European economies. Tunisian exports to the EU fell by 9 per cent and Egypt's by 34 per cent in 2009," Mr Hirsh said.
Saudi shares were down last week on lower oil prices after the International Energy Agency (IEA), which advises 28 oil-importing countries, announced plans to release 60 million barrels of crude from emergency stockpiles over the next month. Half of the oil is to come from the US strategic petroleum reserve.
"Petrochemical stocks are the main driver for the losses on the Tadawul today, because they are exporting commodities worldwide and the sector is very sensitive to oil and global economy conditions," said Hesham Tuffaha, Bakheet Investment Group's head of asset management in Riyadh. The Tadawul All-Share Index closed at 6,449.49 yesterday.
London-traded Brent crude, slid 6.1 per cent to US$107.26 a barrel on Thursday, then dropped $2.14 on Friday to settle at $105.12. The Obama administration insisted the tapping of IEA reserves was necessary to cover 1.5 million barrels per day of oil no longer reaching the market because of the conflict in Libya and to help to stabilise energy prices.
In the UAE and Qatar, fund managers expect lacklustre trading this week after the index compiler MSCI decided to delay its verdict on whether to upgrade the two countries to emerging-market status.
MSCI announced on Wednesday it would extend until December its review of the countries, which it currently classifies as frontier markets. This would give additional time for market participants to assess recent enhancements on the Qatari and Emirati markets, MSCI said.
The delivery versus payment system, introduced in May to satisfy an MSCI requirement, is a securities industry procedure in which payment for a security is made when the security is delivered. Usually, the payment is made to a bank, which in turn pays for the security.
"The MSCI inclusion [would be] positive for the UAE markets, but it is only another tick box in the things-to-do list to improve traded value and investor sentiment," said Mohammed Ali Yasin, the chief investment officer at CAPM Investment in Abu Dhabi, before MSCI announced it was deferring a decision. "International investors will not increase volumes if the local investor largely remains an inactive player."
Dubai's benchmark, the Dubai Financial Market General Index declined 1.8 per cent on Wednesday after the MSCI's announcement, its biggest decline in four weeks. There was little reaction in Abu Dhabi and Qatar, with markets selling off prior to the announcement.
Dubai's index is down by more than 70 per cent since its peak in 2008 and has lagged its regional peers in the past 18 months as its two dominant sectors, property and banking, reel from a property price crash, with Abu Dhabi's index suffering likewise.
Mr Yasin said he expected little movement of the indexes because investors had little incentive to buy ahead of the summer.