The global financial system faces its moment of truth on Monday, September 17, when US markets pick up the pieces from the World Trade Center devastation and try to get back to business as usual.
From Asia to Europe and the Americas, brokers, currency dealers, stock market traders, bankers and investors will look on nervously as the New York Stock Exchange gives its first reaction to Tuesday's shattering events.
Economists expect little short of pandemonium. European share markets priced in heavy falls on Friday, when the London market slumped 3.8 percent and Frankfurt 6.3 percent. Asian markets are expected to follow suit, as all indications from the US bond market, already back in action, are that investors are looking to pull out of stocks into safe-haven assets.
"We could easily see... the US stock market fall by five or 10 percent at the opening," said Royal Bank of Scotland economist Neil Parker, "but what matters is not how large the initial fall is but what direction the US market takes after that."
At NatWest Stockbrokers, economist Jeremy Batstone told AFP: "There have been reports that they might be marked below 9,000 on the Dow." The Dow Jones Industrial Average will resume trading at 9,605.5 points.
Thus far, the response from the world's financial community to the terrorist onslaught on the World Trade Center and Pentagon has been a mixture of disbelief, defiance and decorum. Few have wanted to be seen to make a profit at a time of loss. Bankers and brokers used to stabbing each other in the back have linked arms instead. Central bankers stand primed and ready to act in the case of a systemic breakdown emanating from the destruction of a mighty cog in the global capitalist machinery.
But Friday's dealing showed that this 'gentleman's agreement' will be of short duration. Nerves will be tested when the screens turn red. And dealers will naturally come under pressure to sell from clients.
"You can't really have a gentleman's agreement (on securities markets) when you are dealing with clients," said Roger Alford, a specialist in financial markets at the London School of Economics. "There are people engaged in every conceivable sort of transaction which they were going to finance by selling securities," he told AFP.
"All that one can do is hope there is no panic. What you don't want is a cumulative epidemic of terror that leads people to sell and sell. They would probably close the exchange again if that happened," he predicted.
Financial authorities and banks are taking contingency measures to try and ensure that the system does not fail on Monday. The US Securities and Exchange Commission was expected to relax one of its rules on company share buybacks, and possibly restrict short-selling, where investors profit from drops in stock prices. This would serve to encourage greater buying and limit selling, keeping the market closer to equilibrium.
Alford said central banks would also play a key role. The US Federal Reserve is seen cutting rates — by as much as half a point if bond yields are anything to go by — to encourage economic momentum, but it may well resort to other tactics as well, along with its counterparts around the world.
"There are dozens of quite feasible channels to mitigate any short run pressure on the market, and I'm sure all of those will be used and everyone will try and get a smooth move back to a more normal market," Alford said.
Central banks have already promised liquidity to ensure there is no credit crunch, and have arranged currency swaps with each other to ensure that there are enough dollars in other parts of the world.
Alford said they could also lend to institutions prepared to support the market, or extend credits to banks against their portfolio of government bonds to keep the system liquid. All rather against the spirit of the free market, but justifiable in a crisis, analysts believe.
Still the dollar is expected to come under heavy selling pressure if US equities head south on Monday, even though a US market slump will naturally drag down other bourses from Tokyo to Toronto, London to Frankfurt.
"Our thoughts were basically that the (Dow's) fall would be restricted to maybe two or three hundred points," said Chris Furness, an analyst with the 4CAST financial research house. "Obviously aircraft and airline stocks are going to get whacked, the insurance stocks are going to get whacked, but there are other stocks that would gain," he said. ― (AFP, London)
by Mark Rice-Oxley
© Agence France Presse 2001
© 2001 Mena Report (www.menareport.com)
