Posted by Sadie from D006242.N1.Vanderbilt.Edu (188.8.131.52) on Tuesday, April 08, 2003 at 9:02PM :
Markets rejoice at news from Baghdad
Gloomy economic data ignored as traders seize on progress in the war to push up equities
Larry Elliott, economics editor
Tuesday April 8, 2003
Share prices surged in London yesterday as the stock market celebrated the arrival of American armour in central Baghdad and anticipated the imminent collapse of Iraqi resistance to American and British troops after less than three weeks of fighting.
With dealers betting heavily that a short war in the Middle East will be the catalyst for economic recovery, traditional market havens of gold and government bonds were abandoned in favour of an equity buying spree.
At the close in London, the FTSE 100 index was up 121.4 points at 3935.8, its highest level since mid-January. In Europe, the fifth successive rise in stocks took markets to levels not seen for four months.
Traders said the upbeat mood was a response to optimism that the show of strength by American armoured divisions in the Iraqi capital spelt the end for Saddam Hussein's regime.
Wall Street's Dow Jones index shared in the euphoria initially - at one point it was ahead 3%. However, it later gave back most of the gains and closed up just 23.26 points at 8,300.41.
The turnaround was blamed on the realisation that the war's end would not automatically solve all underlying economic problems.
"For the industrial world as a whole, an economic contraction now appears under way," said Stephen Roach, chief economist for Morgan Stanley, in a research note.
However, some analysts said they were optimistic an end to the war would see the start of an economic recovery which would in turn fuel further rises for stock markets.
"Hopefully oil prices will fall back, the daily routine of decision-making by consumers and businesses will resume and a short time after that the under lying tone of the economic numbers should start to improve," said Mike Lenhoff, chief strategist at private client fund managers Brewin Dolphin.
Dealers also believe that equity markets will be underpinned by rate cuts from the US Federal Reserve and the European Central Bank during coming weeks.
In the commodity markets yesterday, the price of gold tumbled by $5 an ounce to its lowest level in four months. But it later recovered in New York to trade at $323.50.
The price of crude oil reversed sharp early falls to close just three cents lower at $24.65. At one stage, Brent crude was changing hands at $23.40 a barrel - but the downward move was reversed when the oil cartel, Opec, proposed an emergency meeting to discuss output cuts. US crude eased by 28 cents to $28.33 a barrel.
Opec's president said he had proposed an emergency meeting for April 24 to prevent a post-war fall in oil prices.
"My main worry is how to deal with the dramatic price drop," said Mr Attiyah, the oil minister for Qatar, after discussions with the Opec secretary-general, Alvaro Silva.
The cartel is concerned that oil prices - already down 30% from their pre-war peak - could continue dropping to below their $22-$28 trading range unless cartel members rein in supplies.
On the foreign exchanges, the dollar continued to rise, hitting a four-month high against the pound and gaining ground for the fifth day running against the euro.
However, in New York the currency also gave up some of its gains as traders focused on economic news.
At the close in America, the euro, which had fallen to $1.0560 against the dollar, had moved up to $1.0687.
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