War talk triggers stock rally

www.detnews.com Tuesday, March 18, 2003 By Mike Hudson / The Detroit News

Possible quick confrontation with Iraq sends market ahead, drops crude oil prices

DETROIT -- Wall Street saw major rallies on all of its major indexes in response to the U.S., Spanish and British withdrawal from diplomacy efforts at the United Nations.

The Dow Jones industrial average rose 282 points to close at 8,141. The Nasdaq jumped 51 points to close at 1,392. And the Standard & Poor's 500 index rose 29 points to close at 862.

"Removing this cloud of uncertainty is as regarded as a positive development to investors," said Patrick Anderson, principal of Anderson Economic Group, a Lansing-based economic consulting firm. "It's a crazy world we live in when we talk about war and the stock market goes up, but that's how it is in this instance."

The idea that a quick war will help the economy may prevent the Federal Reserve from cutting interest rates at its meeting today, economists said.

Sung Won Sohn, chief economist at Wells Fargo Bank in Minnesota, said Fed chairman Alan Greenspan and his colleagues will start cutting interest rates only if they believe an Iraq war was harming the economy or threatening to disrupt financial markets.

"If the war goes badly, the Fed is going to need all the ammunition it has," Sohn said. "I would expect the Fed to cut interest rates to zero in an extreme situation."

The stock market has been hurt by more than just tensions in the Middle East. It has been fighting off a number of negative factors, including the down economy, a dicey diplomatic environment and lingering effects from the 2001 and 2002 corporate accounting scandals. Because of the complexity of the down market, analysts say, the market will have to see substantial evidence of improvement for Monday's rally to become permanent.

"There will have to be a seismic shift in the current environment," said Dennis M. Nally, chairman of PricewaterhouseCoopers LLP, speaking to the Detroit Economic Club on Monday. "Many factors will have to change before we see a meaningful, long-term turnaround in the market."

In another bright but potentially temporary development, oil prices fell 45 cents per barrel to $34.93 on the West Texas Intermediate market. Prices had topped out at $37.83 per barrel Wednesday.

Energy prices have been the major point of concern for economists because of the damaging effects on consumer spending that high gasoline, natural gas and diesel prices tend to have.

"History would suggest that oil prices would go down fairly rapidly (after war begins), maybe $5-$7 a barrel, probably within one day," said Angus McPhail, an analyst at ING Financial Markets in Edinburgh, Scotland.

McPhail believes markets will be awash in crude after a swift war, particularly if Venezuela continues to recover from an oil industry strike and other members of the Organization of Petroleum Exporting Countries keep producing more than their output quotas. For the second half of the year, ING Financial Markets foresees an average crude price to be around $18.50 a barrel. But the recent drop in oil prices hasn't been reflected at the gas pump.

AAA Michigan reported prices for regular unleaded averaged $1.72 on Monday, unchanged from last week. Across Michigan prices averaged $1.76, up 1 cent from last week. Nationwide, gasoline averaged $1.72 per gallon, AAA said.

"Retail gasoline records are being blown out," said Ed Silliere, vice president of risk management at Energy Merchant LLC in New York, which markets gasoline and heating oil to local distributors. "We can expect prices to rise by another dime in the short term."

A colder-than-normal winter in the United States that sapped heating-fuel supplies exacerbated the problem, forcing some refiners to keep producing heating oil when they might have begun to make gasoline in anticipation of the peak driving season this summer.

Furthermore, the U.S. economy can expect a few days of doldrums if war breaks out. Millions of consumers will spend their free time at home watching news developments, economists say.

The auto industry will be particularly impacted by this phenomenon, Anderson said, although the extent of which will be determined by the length or brevity of the war.

You can reach Mike Hudson at (313) 222-2293 or mhudson@detnews.com. The Associated Press contributed to this report.