Egypt triggering risk aversion...
The kinds of protests that toppled President Zine El Abidine's government in Tunisia have begun to spread in the neighborhood to Egypt. During the last few days, there have been persistent and increasingly deadly clashes between the security forces and anti government demonstrators. The demonstrators are asking for democracy, jobs and President Mubarak's resignation.

...with broad impact on global financial markets...
The Egyptian crisis appears to be reaching a crescendo. The Egyptian government declared a nation-wide curfew. Fitch downgraded the nation's outlook from stable to negative. Geopolitical risk climbed as rising tensions in the Middle East weighed heavily in global financial and commodity markets. It is not common to have crude oil, gold and the US dollar all gain at the same time. Crude oil (WTI) surged 4.3% to $89.33 per barrel despite the recent rise in inventories and concerns about global growth. Gold gained nearly 2% to $1,343.3 per ounce ending a pronounced downward trend. The S&P 500 and Nasdaq markets fell -1.6% and -2.4%, respectively. The fixed income markets rallied across the curve - finally reacting as they should during risk aversion.

...including a classic flight to quality in G10 FX markets
The US dollar, Japanese yen and Swiss franc all benefited as a safe haven currency - something we have not seen in quite some time. Another classic sign of risk aversion is that the JPY and CHF crosses rallied strongly on Friday. EURJPY, GBPJPY, USDJPY and AUDJPY declined 2.0%, 1.6%, 1.0%, 1.0%, respectively while EURCHF fell 1.4%.

Have the markets overreacted? - probably not
There are a few reasons for this. First, the Suez Canal is important to global trade as well as to the local domestic economy. Approximately 10% of global seaborne trade passes through the Suez Canal. According to the US Energy Information Administration, petroleum accounted for 16% of Suez cargos. It is believed that 6 out of 10 container ships involving trade between Asia and Europe. Over 50% of total tonnage is accounted for by container shipping. Second, risk seeking was strong during the second half of 2010 and that carried over into the New Year. It appears this incident is prompting investors into risk reduction mode.

How sustainable is this Egyptian-inspired risk aversion?
There is little doubt the current situation remains fluid. The prospect that President Mubarak will run for reelection during the Fall of 2011 could keep the temperature hot see here. The market has begun the process of pricing in some geopolitical risk premia. G10 FX remains vulnerable particularly as shorter term participants have built short USD positions, such as the EUR, which could be reversed if instability in Egypt escalates and/or spreads into nearby countries leading investors to take flight to quality


**** Key points
* Weaker start to the week due to Egypt events
* US Earnings remain strong overall, but mixed in some sectors
* Amidst all the Egyptology that will dominate headlines today and this week let's not forget that last week's US GDP figures were strong under the surface. This should add to the cautious optimism about the US growth picture and risk appetite more broadly, not least because a similar picture has been reflected in the earnings season so far, where 70% of corporates have beaten expectations. Having said that, this will not be today's market driver, with all eyes on the developments in Egypt and implications for Israel, the broader region and not least the potential disruption of oil supplies. One has to think that a compromise rather than a revolution will be the end game here, but of course the question is how soon and in what manner will such a compromise happen. Not forgetting the Eurozone debt problems, broad outlines of the debt co-ordination plan are due to be presented by Merkel and Sarkozy at Friday’s Brussels summit. This could go either way in terms of market sentiment; if the authorities do not fluff their lines and mange to present a coherent and credible plan, this could add to a more constructive tone in Europe credit spreads. All in all, most likely we start the week weaker, with markets nervous and intra day volatility higher. Having said that, as with most such episodes of volatility over the past few months the action will be mostly concentrated in CDS spreads rather than cash. If anything, one can argue that European credit may enjoy a 'relative safe-haven' status and see a constructive tone, as money-flows into CEEMEA markets slow down or even reverse, at least temporarily.

* Within the S&P 500, around 207 companies have reported earnings thus far and of those 70% have beaten expectations (167 companies beat estimates, 37 were down and 3 were unchanged). Overall, financials are up strongly, but earnings comparisons within banks continue to be distorted due to base effects (for some of the banks which showed a loss last year) while in other cases the profits figures were still rather low. Earnings in non-financials remain robust, although we have seen some disappointments from the consumer sector (that includes autos, food & beverage and personal and household
goods) which has shown some weakness. This coming week should see another
102 companies report and broadly speaking the overall earnings picture should remain broadly strong.


DJ BEFORE THE BELL: US Stock Futures Edge Up; Focus On Egypt

U.S. futures edged higher Monday, as investors weighed concerns over growing unrest in Egypt against optimism over relatively robust corporate earnings thus far.

Futures on the Dow Jones Industrial Average rose 1 point to 11776 and S&P 500 futures gained 2.40 points to 1273.90. Nasdaq 100 futures advanced 4.50 points to 2272.50.

The blue-chip Dow index slumped 166.13 points, or 1.4%, on Friday, posting its biggest decline since November after investors were spooked by the unrest in Egypt.

Pressure on President Hosni Mubarak, who has been in power for decades, escalated over the weekend as protests against his rule continued to rock the streets of Cairo.

The situation in Egypt is "unsettling for sentiment generally," said Mike Lenhoff, chief strategist at Brewin Dolphin in London.

"Who knows where it's going to end and what contagion may result from it," he said. "It's clearly forcing up commodity prices and that is not great news for inflation."

However, "the downside [for equity markets] is fairly limited since we've had good economic news and good earnings results," Lenhoff said.

U.S. investors are awaiting earnings reports from several companies, including oil giant Exxon Mobil Corp. (XOM) and newspaper publisher Gannett Co. Inc. (GCI)

Exxon is expected to report fourth-quarter earnings of $1.62 a share, according to a survey of analysts by FactSet Research.

On the economic front, data on personal income for December are due at 8:30 a.m., EST, to be followed by the Chicago PMI for January at 9:45 a.m., EST.

In the commodity markets, oil futures rose 13 cents to $89.47 a barrel in electronic trading on Globex on concerns that crude supplies may be disrupted from the possible closure of the Suez Canal.

"While there is currently no evidence of imminent closure and Egyptian officials have publicly assured that traffic is running as normal, the proximity of the protests to the canal itself has raised market concerns about security," said Ann Wyman, an analyst at Nomura, in a report.

"Moreover, the imposition of curfews, if sustained, could hamper the canal's operations and lead to delays," she wrote.

Moody's Investors Service downgraded Egypt's government bond ratings to Ba2 from Ba1, citing the sharp increase in political risk.

The Egyptian stock exchange, meanwhile, remained closed for a second day after equities plunged last week.

Equity markets in Asia and Europe posted losses. In Japan, the Nikkei Stock Average dropped 1.2% and the Stoxx Europe 600 index declined 0.5% in intraday trading.

The dollar index, which tracks the performance of the greenback against a basket of other major currencies, fell 0.2% to 78.010.

The euro gained 0.4% to $1.3656.

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