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Egypt's Cheer Could Turn to Caution for Markets

Dhara Ranasinghe

The ousting of Mohammed Morsi as Egypt's president has brought cheer to the crowds gathered in Cairo, but the outlook for Egypt remains highly uncertain and that means caution in financial markets is likely to prevail for now, analysts say.

U.S. oil (New York Mercantile Exchange: @CL.1) prices edged down on Thursday, pulling back from the previous day's 14-month high above $102 a barrel, following news that Morsi was forced out of power by the military on Wednesday.

(Read More: Egyptian Military Says It Has Ousted Morsi; Crowds Celebrate in Cairo )

"I think this was a coup d'etat by the military even if it has a lot of support from the public right now and whether it's called that or not," Steven Fish, professor of political science at the University of California, told CNBC Asia's "The Call."

"Everyone is relieved by the coup but the military doesn't do a good job of ruling. Morsi's government was the first democratically elected government Egypt had for a while and that makes it hard for a new government to declare legitimacy. So the situation is very complicated," he added.

Morsi was elected a year ago but Egyptians have been frustrated by a weak economy and angered by Morsi's decision to force through a constitution that favored Islamists and ignored minorities. That frustration spilled over into protests that have grabbed attention globally in recent weeks.

For the world's financial markets, developments in Egypt are key because the country controls the Suez Canal, one of world's busiest shipping lanes.

(See: Scenes From the Egyptian Protests )

U.S. oil prices pushed firmly above the key $100 a barrel mark on Wednesday amid fears that unrest in Egypt could disrupt oil supplies and destabilize the Middle East, which pumps a third of the world's oil.

"If oil was over $100 and that was because of stronger demand from China then that's good, but this move in oil is about fear and that's never a good thing," said Scott Nations, the chief operating officer and president of NationsShares, a division of Fortress Trading.

U.S. oil futures traded at about $101.15 a barrel on Thursday, while Brent futures (Intercontinental Exchange Europe: @LCO.1) were down a third of a percent but holding above $105 a barrel.

Some analysts were not too concerned about the political strife in Egypt.

"The Suez Canal will remain functional regardless of who is in power and that's the important thing for oil markets," said Mark Matthews, head of research for Asia at Bank Julius Baer. "It's sad for the country's politics as he [Morsi] was democratically elected, but there's unlikely to be a long-term impact."

For others, uncertainty about Egypt, where the military has said fresh elections would be held, was another reason to be cautious towards risky assets such as stocks.

(Watch Now: Kilduff: Oil & Egypt)

Indeed, Egypt's woes are just one source of concern for investors. In Europe, a political crisis in Portugal has triggered a sharp spike in government bond yields while Friday's key U.S. jobs report is another risk event that could shape expectations on the timing for an unwinding of U.S. monetary stimulus.

"We have political events, we have monetary easing in Europe under question, we have Egypt, so the market is playing very cautious right now," said Dodge Dorland, chairman and chief investment officer at Landor & Fuest Capital Managers in New York, talking about U.S. stock markets on "The Call."

"We have a very split market right now, the Russell 2000 (NYSEArca:.RUT-P) and the Nasdaq (^IXIC) are doing well but the Dow (Dow Jones Global Indexes: .DJI) and S&P (^GSPC) are down, so we are very cautious at this point," he added.

- By CNBC's Dhara Ranasinghe; Follow her on Twitter: @DharaCNBC

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