Pakistan’s stock market dropped on Monday amidst a new wave of political crises that threaten to explode into another round of national turmoil.

The second-largest party of the government’s ruling coalition, the Muttahida Quami Movement (MQM) has bolted and joined the opposition, thereby removing a majority presence in parliament and raising the prospect of an early election.

Thus, the position of Pakistan’s Prime Minister Yusuf Raza Gilani (of the Pakistan Peoples Party) has suddenly become extremely tenuous and he faces a possible vote of no confidence (although he has received the support of the President Asif Ali Zardari).

Even worse, an ally of Zardari, the governor of Pakistan’s province of Punjab, Salma Taseer, was just assassinated.

For now, the break-up of the ruling coalition raises doubts about Pakistan’s ability to meet the policy demands imposed by the terms of the $11-billion loan it received from the International Monetary Fund (IMF).

[The] government is running out of allies and more importantly running out of time to bring about corrective measures to stabilize the economy, said Sayem Ali, an economist at Standard Chartered Bank.
[The] IMF staff review is due for June 2010 and the government will need to demonstrate ability to keep [the] deficit at 4.7 percent of GDP and this looks like an impossible task.

However, amidst all this swirling chaos, the Pakistan stock market, the Karachi Stock Exchange (KSE), has performed very quite over the past year (albeit on fairly low volume).

The KSE surged 28 percent in 2010, buoyed by foreign investors who purchased shares valued at about $515-million (primarily in the energy sector). Indeed, the oil and gas sector soared 45 percent (including dividends).

These investors are likely to stay away from Pakistan equities until the political picture regains some clarity (and perhaps if the country can make any headway in trying to meet the fiscal demands sought by the IMF).

Meanwhile Pakistan copes with the insurmountable problems it always has to face, including soaring inflation, gas and fuel shortages, the endless battle between fundamentalists and progressives, and seemingly interminable terrorist plots.

However, perhaps the surprising good health of Pakistan’s equity market shows how disconnected financial trading markets can be from the state of the society they reside in.

Indeed, something not too dissimilar is going on in the U.S., the world’s number one economy and a country totally dissimilar from Pakistan. Analysts are overwhelmingly bullish on the U.S stocks for the this year (after a year in which they already performed reasonably well),

This optimism comes despite a slew of negative fundamentals in the country’s economy and political state: namely, a still-battered housing market, stubbornly high unemployment, a multitude of cities and states on the brink of bankruptcy, and a lame duck President who will be unlikely to get much of this program passed in the face of stifling opposition in the House and Senate.