Monday crash for Gulf stock markets inevitable (Re-post)

Will the Gulf stock markets decide to close and take an extra day for their Eid holiday on Monday? Certainly in the UAE with a closure for National Day on Wednesday it must be tempting to declare a longer holiday and face the music later.

But the global financial market reaction to Dubai’s decision to suspend debt repayments from Dubai World was considerable at the end of last week when local markets were closed for Eid, and we can only anticipate a major sell-off to follow locally.

Overreaction

The authorities have done their best to calm local nerves and to caution against an ‘overreaction’ as the Gulf News described it today. But unfortunately stock markets are prone to overreactions. It is in the nature of the beast when receiving unexpectedly bad news.

The 21 per cent improvement in the MSCI Arabian Markets Index this year now looks vulnerable to a complete reversal. This will contribute to an also inevitable fall in the MSCI Emerging Markets Index, up a heady 71 per cent over the same period.

At the end of November the Dubai Financial Market was the top performing regional market, up 28 per cent, with Abu Dhabi up 22 per cent. Seasoned observers thought local stocks already looking a little overbought, though their fears focused mainly on over-borrowed local families rather than the public sector.

The stage is therefore set for a nasty crash, most likely over several days as circuit-breakers are triggered in major stocks.

Exit rush

For those who have clung on to realize maximum stock market profits rather than taking gains early this rush for the exit door is going to be particularly painful. Perhaps the UAE authorities will intervene. But there is not much precedent for this, and they might see it as throwing good money after bad.

But if it is any consolation to market players then they will not be alone. The contagion from the Gulf stock markets to the rest of the emerging markets will be both direct and considerable. Gulf players will be sellers to pay margin calls, and this is also going to be a considerable wake-up call for emerging market stock markets which have gotten far too high.

Mark Mobius thinks this is the start of a 20 per cent correction across the board for the emerging markets, and after their recent massive gains that could be an underestimate of the downside now.

Will this emerging market stock market correction also finally kick Wall Street off its perch and end its record rally from the lows of March? Will oil and even gold prices fall? That is also looks inevitable. This is a stack of dominos waiting to fall.