War drums perversely send stocks higher around the globe

By NZPA

Tuesday 18th March 2003

The intensified beat of war drums today perversely sent stocks higher both here and in major world markets.

The London FTSE 100 rallied 3.4 percent, taking that battered market's rebound over the past three days to more than 12 percent. Wall Street followed with a 3.6 percent rally and the local market, after a quiet start, closed up 1.23 percent.

Locally the New Zealand market was the laggard but still ended positively, up 1.23 percent on the NZ-50 gross and 1.31 percent on the older NZSE40 capital index.

Investors who have stayed away from the market in recent days, climbed back in, pushing the total turnover to over $100 million.

United States President George W Bush's ultimatum to Iraq president Saddam Hussein to quit the country within 48 hours or face war came after Wall Street closed.

The tough talk sent US equity index futures down initially, but other stock markets in Japan, Hong Kong and Australia continued to rally strongly.

Share brokers and analysts said markets rallied because there was greater certainty now that the talking was finished and war w as imminent. They also mostly seemed to be betting on a short war -- something that is far from certain.

"They are betting on a quick war," said Forsyth Barr Frater Williams executive director Don Turkington. "They (stocks) are rallying because there is a degree of certainty, they think.

"They (investors) think there is certainty because President Bush is going ahead. And they think it will be short and sharp.

But he and others warned: "All that could be proved wrong, so this volatility is pretty dangerous stuff and I don't think you will see a lot of private client action."

Brokers said there was also an element in today's rally of an old sharemarket adage -- buy the rumour, sell the fact.

Part of the strength of the rally in overseas markets has been caused by big hedge funds reversing their positions. Initially the funds, which tend to take a contrarian view to investing and markets, bought heavily into oil and gold and sold equities on the prospects of war with Iraq. But latterly, they have got cold feet and have been scrambling to reverse their positions.

The price of gold has dropped sharply in recent days while crude oil prices which have risen almost 50 percent from November until last week, dived.

Dubai light, commonly used in New Zealand, slumped from $US29.37 last Tuesday to $US25.41 today.

Macquarie Equities investment director Arthur Lim said history appeared to be repeating itself with sharemarkets around the world responding similarly to how they reacted to "Gulf War One".

In the aftermath of Saddam's invasion of Kuwait in July 1990, sharemarkets around the world dropped 20 percent. By the time the bombs started falling in Baghdad in early 1991, sharemarkets began to rally.

Following a prolonged build-up, it became clear within weeks of the start that the war would be short, so by the time the war ended, sharemarkets were mostly higher than before the invasion of Kuwait.

"This time, we are seeing it even before the first shots are fired. If there is one lesson to be learned, it is that history does repeat itself," Mr Lim said.

While there was greater certainty that war would occur, there was a danger in markets pricing in a quick resolution to the war, he said.

"If that doesn't happen, you can expect markets to retrace."

Rohan Walsh, head of Australian equities at Invesco Australia, said he wouldn't be surprised if volatility continued in equities markets.

"If Saddam does decide to take one of the package deals and head offshore then that's probably a fantastic outcome, or if war starts the market, again, might think that's good, but if oil wells start getting blown up that's more uncertain," he said.

Comments from our readers

No comments yet