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DUBAI, June 6 (Reuters) - Qatar's stock market may remain weak on Tuesday after Saudi Arabia, Egypt and the United Arab Emirates severed ties with Doha, but the drop should slow from Monday's 7.3 percent plunge, fund managers said.
Monday's panic selling may ease if investors start speculating about the possibility of some kind of negotiated solution, while some traders think Qatari state-linked funds could eventually enter the market to provide support.
"While we think the near-term impact of the crisis is easily containable by Qatar, which has substantial resources it can employ, we see considerable risks regarding the economic and financial impact of these sanctions the longer they remain in place," said a note by Citigroup.
A key question for the market is whether Qatar's financial ties to Saudi Arabia and the UAE are cut off, in addition to its transport ties. Saudi and UAE bankers said late on Monday they had so far received no instructions from their regulators to do this.
But some Sri Lankan banks stopped buying Qatari riyals on Tuesday, saying their counterpart banks in Singapore had advised them not to accept the currency.
On Monday some Egyptian banks said they too had stopped dealings with Doha-headquartered lenders, though Egypt's central bank urged banks to continue dealing in Qatari riyals.
A Saudi-based money market manager told Reuters that although he had not received a directive from the Saudi central bank to stop dealings with Qatar, he was "taking precautionary steps to keep away" until the situation started to show signs of de-escalating.
A note by Capital Economics said one potential concern was that Qatari banks, the dominant sector on Qatar's stock market, might now find it more difficult to secure wholesale financing, which could "precipitate a more abrupt cooling of the country’s credit boom".
Gulf markets in general look set to have a soft tone after global bourses dropped, partly because of the Gulf tensions. Brent oil fell 1 percent on Monday and has since retreated a further 0.4 percent to $49.26 a barrel.
Any losses in Saudi Arabia, however, may be limited by expectations that MSCI will start on June 20 the process of upgrading Riyadh to emerging market status. Hopes for this have buoyed the Saudi market in recent days. (Reporting by Celine Aswad; Editing by Andrew Torchia)