Markets take clinical view after terror attacks

Brian O'Mahony column

That is not to imply this was good news for investors, given the carnage visited on so many innocent people.

In fact, the markets showed that terror attacks have now been stitched into their view of the world, which is not very reassuring.

They no longer panic and press the sell buttons on their screens.

At its crudest, it means that after seeing the terrorist attacks in New York and Madrid, fund managers were primed for an attack on London.

London was off 4% after the blasts rocked the city. By midday, it had shed E75 billion in its heaviest hit since March 2003.

However, it had recovered a substantial amount of the loss by late afternoon and was down by just 1.4% as the markets calmed down and assessed what was in store.

The Irish markets fell 3.6%, losing over 3bn at one point, mimicking London.

But it also clawed back much of the losses as London took the clinical view that life would go on.

It was quite surprising in the aftermath of the blast that oil prices fell by a full $4 per barrel.

Traders took the view that the attack would

undermine global growth, and oil prices fell as a

result.

One might have expected the terror attacks would have immediately raised concerns about future oil supplies, but they did not.

In one sense, it is probably fair to say that initially markets reverted to type in their initial reaction. Terror is bad for business, therefore bad for profits, therefore bad for shares so ‘sell, sell, sell’ was the initial stance.

On the oil front the initial response echoed the view of the stock markets.

Those views were shortlived, however. The markets recovered and so too did the price of oil.

It closed above $62 per barrel by the end of the day in New York. That was

further testament at that stage, that the underlying issue of demand outstripping supply is in fact a fundamental reality when it comes to oil.

Earlier this week, Jim Power, chief economist at Friends First, agreed the oil market was likely to stay at current levels and said prices of $60 per barrel were likely to become the norm for some time.

It is quite extraordinary how little impact the oil situation has had on the global economic outlook.

In the past two weeks, both the Economic and Social Research Institute and Mr Power issued upbeat projections for the Irish and the global economy for 2005 and next year.

Europe remains a bit of a basket case, but the general view is that the world, including the struggling European economy, can live with significantly higher oil prices.

Last week, the ESRI said if oil prices soared to $100, the end result would be to knock 1% growth off world output.

The rule of thumb appears to be that every $10 rise in the cost per barrel knocks 0.25% from global growth.

That’s the simple economic model, but the issue is bigger than that and

the oil question will continue to make headlines until plentiful amounts of alternative energy sources are found.

That is not about to happen anytime soon. Prepare for interesting times ahead, the sceptics warn.

One further point emerging from both economic reviews that gives cause for reflection is the question of where the jobs will come from when the construction boom ends.

Latest figures suggest housing and related services contributed 40,000 of the last annual increase in jobs of 72,000.

As we all know, because we have all been told a thousand times, construction cannot continue at current levels forever.

At that critical point, the economy looks as if it will have a very real problem other than surging oil prices that may be at $100 per barrel by then.

Finding an alternative source may not be as easy as it looks, particularly if global growth takes a hammering because of the oil factor.

It is quite interesting how sentiment has swung in that regard and increasingly economists, who have been in denial about the oil question, are beginning to catch on at last.