Saudi Arabia’s stock market was flat in early trade yesterday as investors shrugged off rising tensions with Iran, while Egypt’s bourse pulled back amid global weakness in equities.

The Saudi stock index initially fell as much as 0.7 per cent after Saudi Arabia cut diplomatic ties with Iran in response to the storming of its embassy in Tehran – part of an escalating row between the rival powers over Riyadh’s execution of a Shi’ite Muslim cleric.

Growing geopolitical risks also pushed the Saudi riyal down in the forward foreign exchange market yesterday, and could deter foreign investors from buying Saudi stocks.

But the vast majority of investors in the Saudi stock market are local retail players, and they bought some major blue chips yesterday morning, leaving the index flat after an hour of trade.

Leading petrochemical producer Saudi Basic Industries edged up 0.3 per cent and National Shipping Co (Bahri), a top oil transporter, gained 1.5 per cent.

The rises suggested the Saudi market may have for now at least factored in the austerity measures in last week’s 2016 state budget, including gas feedstock price rises for petrochemical firms. Rising trading volumes yesterday indicated some investors were returning to the bourse after being absent during uncertainty over the budget.

Savola, one of the few Saudi companies with a presence in Iran, fell 2.2 per cent. The food conglomerate has edible oil factories in Tehran; Iran provided 11 per cent of its total revenue in the third quarter of 2015 and the company’s revenues from Iran totalled 2 billion riyals ($534 million) in the first nine months of 2015.

But some banks rose; annual corporate earnings reports are about 10 days away, with banks usually the first sector to report in Saudi Arabia. The banking sector has been relatively unscathed by the austerity measures.

“We estimate the net profits of Saudi banks at 42.7 billion riyals ($11.4 billion) in 2015 compared to 40.2 billion riyals in 2014 – a 6.4 percent increase,” said a note by Riyadh-based Albilad Capital.

Two Islamic lenders, Al Rajhi and Alinma , are expected each to increase fourth-quarter earnings by 14 per cent year-on-year, and by one per cent from the previous quarter, according to the note. Al Rajhi shares rose 2.4 per cent while Alinma was flat.

In Egypt, Cairo’s main index slid 0.8 per cent, erasing some of Sunday’s gains in broad sell-off. Blue-chip lender Commercial International Bank fell 0.7 per cent after surging 7.4 per cent in the previous session.