Egypt's presidential elections have been quite volatile. Their judicial system, backed by the Egyptian military, closed down parliament and later the Supreme Council of Armed Forces redefined the constitutional powers of the president so they can retain their power even if the Muslim Brotherhood's candidate takes office. I thought it would be interesting to see how their financial markets are reacting.
The CDS market didn't react very much. It still costs around 650 basis points to buy protection against an Egyptian default over the next five years.
The stock market sold off by a few percent but it is well above its previous lows.
On the other hand, their currency has continued to sell off in the nondeliverable forward market.
What does this mean?
1. It's not actually a coup. The markets have understood that the military is in charge and this is just a little unexpected volatility.
2. The bond market is afraid of an Islamic party gaining control and believes that the military's establishment candidate offers them the best chance at getting paid back. According to the world bank, Egypt's central government's debt is over 70 percent of GDP so it will be a significant variable for the new government to address. They will probably use devaluation to the extent that they can get away with it.
3. This is how the military negotiates with their opposition and it will be business as usual soon enough.
It will be interesting to see how the situation develops. This might even reduce the chances of an Israeli strike on Iran in the short term as they have to deal with more instability on their borders.