Stocks soar on verge of war - Despite optimism, analysts warn of fragile global economy
www.msnbc.com By Paul Blustein THE WASHINGTON POST
March 18 — Four trading days ago, financial markets the world over seemed on the verge of melting down because of fears that the impending war against Iraq would inflict severe damage on the global economy.
NOW THE markets are sending a jarringly different message about the war: Bring it on — because the sooner it’s over, the faster the world’s major economies can begin to mend.
As if rejoicing over the dissipation of a perplexing fog, investors issued a collective roar of approval yesterday to weekend news indicating that the United States and its allies would allow no further time for diplomacy before attacking Baghdad.
The Dow Jones industrial average, which had fallen close to five-year lows last Wednesday morning, rose 282.21 points, or 3.6 percent, to close at 8141.92, the fourth straight day of gains. Oil prices dipped, and the main stock indexes of Britain, France and Germany, which were plumbing depths in the middle of last week not seen since 1997, posted percentage increases almost as large as the Dow’s. The jumps capped the biggest three-day rallies in recent memory for the London and Paris exchanges and the biggest for German stocks in 15 years. An exception to the positive trend was the Tokyo stock market, where the Nikkei index fell 1.6 percent to close barely above its 1983 level. [In early trading today, however, the Nikkei rebounded strongly, rising 2.3 percent, to 8050.94.]
Fueling the gains was the widespread belief that the odds favor a relatively short war, and that whatever the benefits and drawbacks of an attack, at least an end is in sight for a period during which war jitters — and the accompanying rise in oil prices — have kept businesses from pursuing expansion plans and consumers from feeling in a buying mood.
But as the recent market downturns suggest, worries abound that the invasion will lead to a political and military quagmire, with possible fallout ranging from anti-American uprisings in Islamic countries to the destruction of Middle East oil fields to terrorist attacks on U.S. soil. So while the commencement of hostilities will probably prove a tonic for listless economies if the war goes smoothly, dangers to the economic outlook remain huge, analysts warn.
“The worst thing for markets is uncertainty, and after the summit on Sunday, it’s clear the war is likely to start this week,” said Stefan Schneider, chief international economist at Deutsche Bank AG in Frankfurt. “So now people think, if this whole thing is unavoidable, it’s better to get over it soon, so we don’t have all these negatives weighing on the economy.”
FRAGILE GLOBAL ECONOMY
But Schneider shares the concern of many other experts that the global economy is fragile and that recessions could hit in the United States and the European Union — the world’s two biggest economies — because of the potential ramifications of war, including the prospect that oil prices fail to subside or rise even further. Crude oil prices rose to a 12-year high of nearly $38 a barrel last week, though the price settled at under $35 yesterday.
“If oil stays above $30 a barrel for the remainder of the year, that could well do it for both economies,” he said, adding that Europe is particularly vulnerable because its economy is already crawling at about a 1 percent annual growth rate. “It wouldn’t take too much of a negative impact to push euro-land into recession,” Schneider said, referring to the 15 nations that use the euro.
SIMILAR TO ’91? If there is one thing economists agree on these days, it is that forecasting has rarely been more difficult, given the imponderables about how the war and its aftermath will proceed. But broadly speaking, the debate over the economy’s future divides analysts between those who believe chances are high that the upshot to the war will closely track the events that followed the first Persian Gulf War in 1991 — when oil prices plunged and stock markets surged — and those who doubt such an outcome is likely. “We think this looks just like 1991 — the pattern of stocks is the same; the action in oil is almost the same,” said Frederick P. Leuffer, senior energy analyst at Bear Stearns & Co. “You’ll recall that the night the war started, within five minutes of the first bomb being dropped, oil prices fell from $34 [a barrel] to $20 — whssst, straight down.” The same will be true this time, he predicted, “unless Iraq torches its fields, or if there’s not some exogenous problem that we can’t foresee.” But others contend that current circumstances are very different. In 1991, “the U.S. economy benefited from the fact that everyone perceived America had won a clear and decisive victory,” David Hale, an independent Chicago-based economist, wrote in a newsletter last week. “The clarity of the outcome had an immediately beneficial impact on oil prices, stock market prices, and the confidence of both companies and households. It is far from clear that the coming war will produce as decisive and clear an outcome.” Even a quick victory over Iraq leaves open a host of ugly possibilities, Hale noted — insurgent actions against occupying U.S. forces being just one. Beyond that fundamental issue lie differences over several other crucial points.
GAUGING OIL PRICES Among the most important is whether conditions in oil markets are ripe for a price decline. Optimists reckon that a “war premium” of as much as $10 to $12 a barrel has been built into prices because of fears about nightmare scenarios in which extensive destruction of oil facilities could cause crude to shoot into the $60 to $80 range. That premium will evaporate, many energy specialists believe, once it is clear that missiles launched by Iraqi President Saddam Hussein haven’t hit neighboring countries’ oil fields and refineries. “He could act like a complete lunatic and destroy his own oil industry in desperation,” said Leo Drollas, chief economist at the Centre for Global Energy Studies in London. “But I personally doubt it, and if all goes smoothly, we’ll have a little bit too much oil, causing prices to fall once we get into April and the summer.” But a gloomier view holds that oil prices will stay high regardless, because the market is reflecting reductions in world oil supplies associated with turmoil in Venezuela and other factors. “Right now, inventories are at the lowest level in 30 years. The last time they were at this level, Dick Cheney and Don Rumsfeld worked for Jerry Ford,” said Philip K. Verleger Jr., an energy specialist at the Council of Foreign Relations. And even if President Bush and other world leaders order a release of crude from their nations’ strategic reserves, the downdraft in prices will be short-lived, Verleger said, because as soon as prices fall below $30 a barrel, the Organization of Petroleum Exporting Countries will curb production. The effect on the major industrialized economies of hikes in the price of foreign crude is not as severe as it once was, optimists say, because of energy efficiencies that have been achieved since the first oil shocks of the 1970s. Paying OPEC more for oil once imposed a stiff “tax” on the U.S. economy, but per dollar a barrel, that tax has abated over time. In 1980, oil imports were about 3 percent of U.S. gross domestic product; in the fourth quarter of 2002, they were 1.1 percent. “But regardless of the fact that we are less dependent than 30 years ago on energy, and the impact of a $1-per-barrel increase is not as large as it used to be, if you get a lot of dollars of increase, it’s going to have an impact,” said Richard Berner, chief U.S. economist at Morgan Stanley, who said that because of the danger that prices will stay high, “we’re flirting with a double-dip [recession].”
WAR’S OUTCOME Finally, there is the ultimate, unknowable question of how the war will affect business and consumer confidence. John Llewellyn, global chief economist at Lehman Brothers in London, puts the risk of global recession at 30 percent because he believes the public has not factored in the potential cost of rebuilding Iraq’s economy and controlling its ethnically fractured populace. “Even if this goes militarily quickly, the peace may be long and expensive,” Llewellyn said. “That’s the potential shock to confidence. People will realize that the United States, and other allies, are going to get bogged down in a long, expensive process. That will not be good for confidence.” Other indicators: The Nasdaq composite index rose 51.94, to 1392.27; the Standard & Poor’s 500-stock index rose 29.52, to 862.79; the New York Stock Exchange composite index rose 142.32, to 4783.95; the American Stock Exchange index rose 5.58, to 820.65; and the Russell 2000 index of smaller-company stocks rose 11.01, to 365.40. Advancing issues outnumbered declining ones by 8 to 3 on the NYSE, where trading volume rose to 1.67 billion shares, from 1.52 billion on Friday. On the Nasdaq Stock Market, advancers outnumbered decliners by 2 to 1, and volume totaled 1.84 billion, up from 1.57 billion. The price of the Treasury’s 10-year note fell $11.25, and its yield rose to 3.84 percent, from 3.70 on Friday. The dollar rose against the Japanese yen and the euro. In late New York trading, a dollar bought 118.44 yen, up from 118.34 late Friday, and a euro bought $1.0635, down from $1.0745. Light, sweet crude oil for April delivery settled at $34.93, down 45 cents, on the New York Mercantile Exchange. Gold for current delivery rose to $337.10 a troy ounce, from $336.50 on Friday, on the New York Mercantile Exchange’s Commodity Exchange.