"Market impact of the terrorist bombings in the USA
The bombing of the World Trade Centre and of the Pentagon have created situation where no precedent exists. We have therefore no prescribed standards to go by, and that makes any forecasts extremely difficult.
Short-term reactions
We believe there is a risk of further stock market falls - perhaps in the order of 10 per cent - in the coming days, partly as a result of knee-jerk panic among investors, partly because some investors worry about the medium-term effects on the world economy. But before we begin fearing a meltdown in the stock markets, one has to remember that the markets have already fallen sharply since the middle of last year, and that the past month has been particularly bad for the stock markets.
A recession scenario is already partly priced in. And exactly that factor makes it possible that markets begin to recover already today. In any event, markets will be unsettled in the coming days and short-term fluctuations will be significant.
The dollar weakened, but did not collapse, and we do not fear a further large movement against the euro and yen. But the trend is likely to be in the direction of a weaker USD. CHF could also profit from the uncertainty, possibly together with GBP.
Bond and money market futures gained, indicating that the market believes that the declarations from central banks in effect mean that short-term interest rates will fall further in the months to come.
The bond markets moved up sharply on a combination of recession fears nd simple safe-haven capital flows. We believe that bond prices may increas yet another bit, but not significantly.
Oil prices jumped some ten per cent. But unless the situation in the Middle East changes dramatically for the worse, there is little reason to fear significant further increases here. Gold and other precious metals may well increase a bit further in the short term.
The longer term outlook
There are two factors that really count here: US consumer confidence and trust in the dollar as the world`s safest currency.
The shock and grief gripping the USA in these hours may lead to a sharp rop in consumer confidence and later to a drop in private consumption. This danger was present before yesterday`s events, but the risk has certainly become more significant. We do not believe in a collapse in the world economy, but retreating US consumers can protract the current downturn more than expected. Instead of a recovery emerging at the start of 2002, the recovery could be postponed for up to one year. It bears consideration that seen from a macroeconomic point of view, a pause in consumption would ave the positive effect of reducing household debt, which would be healthy.
In Europe, we expect the direct economic impact to be negligible.
If US consumer confidence begins to weaken, the slump in the stock market will continue for some time. But it will not lead to a collapse, given that a recession is already on the cards.
The other important factor is the dollar. For the past years, the US has been running a huge current-account deficit, financed by portfolio inflows as well as foreign direct investments. Portfolio flows have to some extent been determined by the simple fact that the USD is considered the safest currency in the world. If this belief is shattered - most notably among Japanese long-term investors - it will mean that the USA will have to have higher interest rates and bond yields to attract capital. In the transition to higher bond yields, it is likely that the US dollar will weaken.
An alternative view
While most of what we set out above is quite negative, there is also a real possibility that the current situation represents the expected climactic sell-off in the stock markets and that we have now seen the trough of the stock markets. We will follow up on that proposition in the near future.
Short term
- Stock prices will gyrate, with a risk of further falls, but no meltdown. Airlines, banks, and insurance will be the big losers.
- Dollar likely to weaken further, but no sell-off. CHF and GBP may gain.
- Bond yields will go lower.
- Oil and precious metals will stabilise.
Longer term
- A strong fall in US consumer confidence may indicate that the recession will be longer - stock markets may not recover mmediately.
- The dollar would trend lower as mainly Asian investors abandon the notion of the dollar as the world`s safest currency."
