Violence doesn't shake up Egyptian stock market

Supporters of ousted president Mohamed Morsi demonstrate in the street earlier this month.
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Supporters of ousted president Mohamed Morsi demonstrate in the street earlier this month.

Investors on Egypt's Stock Exchange appeared unfazed by the renewed spike in violence across the country over the weekend, with the benchmark EGX 30 index easing only 0.7 percent in Sunday trade.

The number of fatalities in clashes between Egyptian security forces and supporters of ousted President Mohamed Morsi has now risen to at least 74, according to the Health Ministry. Representatives of the Muslim Brotherhood claim the toll has already exceeded 100. Either way, it is one of the worst incidents of bloodshed since the uprising began on June 30.

(Read more: Dozens shot dead; US tells Egypt to pull 'back from the brink')

Troubling scenes emerged over Saturday night from the Rabaah Al-Adawiyah Mosque, the epicenter of pro-Morsi demonstrators. Many were shot in the head and the chest, according to a detailed account by Human Rights Watch.

Sunday trade was out of the ordinary given the noted return of confidence among equity investors in the Arab World's most populous country. Orascom Construction Industries (OCI), the stock with the heaviest weighting, masked a more positive current, led by the likes of private equity giant Citadel Capital, which jumped five percent.

Notwithstanding the pervasive political uncertainty, the EGX30 has in fact gained 13.5 percent over the past month. Volumes are on the rise, and on Sunday, foreign investors were net buyers. The Market Vectors Egypt ETF, one of the most popular ways for US investors to gain exposure to Egypt, will get a chance to react to the latest developments on Monday.

(Read more: Egypt's Brotherhood stands ground after killings)

There are encouraging signs. A new cabinet has assumed its tenure, packed for the most part with prominent civilian technocrats to steer the state's transition to new elections, and vitally for most Egyptians, revive a crippled economy.

Aid pledges from the oil-rich Gulf amount to $12 billion so far, a last-minute lifeline to avert a looming balance-of-payment crisis. The new Finance Minister, Ahmed Galal, said late last week that the money would be used to boost reserves and push stimulus, rather than austerity policies. Depleting foreign currency reserves of the Central Bank also get a lift, reflected early on by a marginal strengthening of the local currency in recent days.

The long-touted IMF loan talks, continually pushed back, appear to have been put on hold indefinitely. From the IMF's perspective, the interim government does not have the requisite legitimacy and recognition, and for Egyptian policymakers there is no longer a sense of urgency with external financing emanating from the Gulf.

Political impasse

But the political impasse between the two camps appears, for the moment, irreconcilable. Pro-Morsi supporters say that despite the casualties, they intend to stand their ground until their demands are met.

Egypt's Minister of Interior denied that riot police had fired on protesters. Yet he also made it clear they would press on with plans to break up the sit-ins, raising the prospect of another round of battles. It all comes on the back of millions taking to the streets on Friday in a public display of support to give the military a mandate to fight "terrorism."

(Watch now: Clashes in Cairo leave many dead)

"To restore stability, I'd expect to see a carrot and stick approach—the heavy-handed treatment of pro-Morsi demonstrators represents the stick, the carrot will come in the form of pro-poor policies and handouts in the coming weeks," Farouk Soussa, chief economist for the Middle East at Citi, told CNBC.

U.S. Secretary of State John Kerry described the situation as a "pivotal moment," underscoring the dangers of an intensified crackdown on protesters.

"Violence not only further sets back the process of reconciliation and democratization in Egypt, but it will negatively impact regional stability," Kerry said in a statement.

Upbeat market sentiment is not likely to last long, experts tell CNBC, if national reconciliation is not achieved. That may be exactly the scenario investors have yet to truly price in.