Markets forecast war likely outcome

WAR is the main item on the international agenda for the markets as investors, advisors and commentators try and price-in the effect of the real possibility of Gulf War II.

"War is the only item on the agenda right now," said Ulster Bank's economist Niall Dunne.

"In thin trading conditions, two possible solutions to the war were considered by the market.

Early in the session the prospect that Saddam might go into exile seemed to be gaining the upper hand but news in the afternoon that Britain is to send 30,000 troops to the Gulf, and comments from US Secretary of State Colin Powell saying that the world must not 'shrink from its responsibility' to disarm Iraq, confirmed the market's pessimism.

"War is the only anticipated outcome of current developments," he concludes.

Mr Dunne says one of the key dates in the coming week is US President George W Bush's annual State of the Union Address.

"There is already a rumour in the market that Bush will take the opportunity afforded by the address to declare war. And as war becomes increasingly inevitable, the USD continues to fall," he told investors in a note yesterday.

Mr Dunne says its wait-and-see for the next few days, pointing out that the euro has become established above $1.06, with scope to go higher on the outbreak or declaration of hostilities.

Goodbody Stockbrokers' Colin Hunt said the sending of 30,000 British troops is more than sabre-rattling and points out that Brent crude has increased 32.8% in the last 10 weeks.

"An oil increase of this magnitude is sufficient to act as a considerable restraint on activity in an already fragile recovery environment and will add to concerns on the double dip front.

"Markets now desperately need a definitive resolution to the Iraq issue if the US is to remain on an unspectacular but positive growth trajectory," added Mr Hunt.

On January 16, 1991 when the Gulf War started as US-led forces attacked Iraq in Operation Desert Storm oil prices spiked to 40 before easing.

Stock prices initially held during the war but in the following four months the S&P index increased by over 10%. But it wasn't until 1994 that S&P 500 earnings exceeded the level they'd reached in 1989.

In 1991, investors sought safe havens and the price of gold and bonds rose. Gold currently hovers at close to six-year highs.However, shortly after the Gulf War, North America was sent into recession.

Gambling may surge, as it did after the onset of the Gulf War and the recession which followed, helping casino and bookmaking stocks.