Egypt, Portugal Put Market Risks Back on Table

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Concerns about the U.S. Federal Reserve taking back some of its monetary stimulus has increased risks for financial markets. Now, jitters about political unrest in the Middle East and renewed concerns about some of the euro zone's smaller economies could ensure high risk stays there for a while.

European stocks fell more than a percent on Wednesday morning, Asian equities traded lower, U.S. oil prices jumped more than 2 percent to above $100 a barrel and the Japanese yen fell to a fresh five-week low at about 100.85 per dollar.

(Read More: US Oil Jumps Above $100 a Barrel)

Strategists say that just as markets showed signs of stabilizing at the start of the week from concerns about an unwinding of U.S. monetary stimulus, political turmoil in Egypt, a political crisis in Portugal and renewed concerns about Greece provide investors with additional reasons to stay away from risky assets.

In a reminder that the euro debt crisis is not over yet, euro zone officials said on Tuesday that Greece has three days to reassure its lenders it can deliver the conditions of its international bailout in order to receive the next installment of aid.

"This saw the 'Greek tragedy' of the last three years remerge, which sent the peripheral countries on a roller-coaster trading session, with the ASE [Athens Stock Exchange] dropping 3.24 percent by the close [Tuesday]," said Evan Lucas, a market strategist at trading firm IG, in a note.

"The spread of the Egyptian uprising is also affecting global markets…So, the 'stabilization' buzzword from Monday's session has been replaced with 'instability,' he said.

Trade in the first half of the year was marked by strong risk appetite, with optimism about the outlook for the world economy helping drive stock markets in the U.S., Europe and Asia to multi-year highs.

(Read More: 10 Things You Need to Know About the First Half)

But since comments from Fed chief Ben Bernanke in May triggered speculation that the central bank could start to take back the monetary stimulus it has pumped into the U.S. economy over the past few years, fear and uncertainty have been the order of the day for investors.

"There's a heightened sense of risk in financial markets in the last couple of weeks, with heightened volatility around China repo rates and the talk about Fed tapering," Tony Nash, managing director at consulting firm IHS told CNBC Asia's "Squawk Box," referring to a sharp tightening in Chinese liquidity conditions last month that sparked fears about a sharp slowdown in growth and dented markets inside and outside China last week.

"We also have a number of things of going on in the Middle East," he added.

Portugal Woes

For some analysts, political developments in Portugal were also worth paying attention to.

Portugal faced a crisis on Tuesday after the country's foreign minister resigned from the center-right government, the second minister to do so within a 24-hour period. Finance Minister Vitor Gaspar, who has implemented unpopular austerity measures as part of $101 billion bailout deal from the European Union and International Monetary Fund, resigned on Monday.

(Read More: Portugal Throws New Curve Ball in Euro Debt Crisis)

Stocks in Portugal dropped 6 percent on Wednesday morning, with major bank stocks such as Espirito Santo falling more than 10 percent.

"There are increasing reasons to be concerned about developments in Portugal, which has been the 'forgotten country' for much of the [euro zone debt] crisis," analysts at JPMorgan said in a note.

Yields on Portuguese government bonds have risen sharply in the past two days, with the benchmark 10-year yield trading at about 6.45 percent. The euro hit a one-month low around $1.2960 on Tuesday and hovered near those levels on Wednesday in Asia.

"We went short the euro about two weeks ago and that trade is working out well. We have the news on Portugal and Greece and on top of that we have S&P sounding a bit cautious on European banks, so there should be further downside to the euro," Nizam Idris, head of strategy for fixed income and currencies at Macquarie bank, told CNBC.

Ratings agency S&P on Tuesday cuts its credit ratings for three major European banks: Credit Suisse, Barclays and Deutsche Bank citing greater regulation and uncertain market conditions.

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