If ever we had any doubts what the term 'volatility' really meant, the events of the last seven days must have served to put an end to them. Last week, as the global equity markets apparently 'factored-in' a short war in Iraq, substantial gains were registered all round. This week, on the back of negative images from the Iraq front, it seems the process may be reversed. And long run prospects? These, surely, are impossible to forsee. 'Poor visibility' can never have been a better applied than as a description for what we currently face. Even on the best case war scenario, the future certainly looks a good deal more complicated than it did a week ago, and downside risks stronger than ever.
Fears of a prolonged, messy war in Iraq (news - web sites) swept financial markets for a second day in a row on Tuesday, knocking stocks, boosting oil prices and hitting the dollar. Gold was up $3 an ounce and bond prices climbed, pushing down their yields sharply, as investors sought safe havens. Governments across the world were also beginning to count the cost of the war. President Bush was seeking $75 billion in emergency funding. Investors' hopes for a quick end to the war have been sinking fast amid graphic pictures of captured and dead U.S. soldiers, fierce resistance from Iraqi troops, and a tough battle for Baghdad looming. The mood is a complete about-face from the past few weeks when stock markets rallied and safe-haven positions were dropped in a "relief rally" over the end of uncertainty about the start of the war and a view it would be over swiftly.
European shares added to losses of as much as 5.5 percent on Monday, although they were off their Tuesday lows. The FTSE Eurotop 300 index was down 1.11 percent and the narrower DJ Euro Stoxx 50 shed 1.05 percent. Both had earlier fallen by more than two percent. Dealers were also braced for more losses on Wall Street to add to the Dow Jones industrial average's 3.6 percent sell off on Monday. "The news coming out of Iraq hasn't improved and with the dollar weak and oil prices rising, the two or three elements that supported us last week are turning in the opposite direction," said Gert de Mesure of Delta Lloyd Securities. Japanese stocks earlier ended down by over two percent. The benchmark Nikkei average fell 2.33 percent or 196.31 points to 8,238.76, wiping out most of a 2.93 percent rally in the previous session. The broader TOPIX fell 2.30 percent to 812.29.
Oil prices built on Monday's gains and last week's four- month lows, although they were still well off recent near $40- a-barrel highs. Prices were also driven up by tribal violence in Nigeria which has cut that country's crude output by 40 percent. The price of oil has been of particular concern to markets in the run up to war because of the damaging effect increases can have on the stuttering global economy. U.S. light crude was up 73 cents to $29.39 a barrel, extending Monday's $1.75 jump. London's Brent crude climbed 64 cents to $26.73 a barrel.
Concerns the war could last longer than initially expected boosted traditional safe-haven investments like government bonds and gold for a second straight day. The two year Schatz yield was 2.5 basis points lower at 2.54 percent, while benchmark 10-year Bund yields were 4.1 basis points down at 4.16 percent. Yields on the 10-year U.S. Treasury fell 3.7 basis points to 3.93 percent. Spot gold traded at $332.50/333.50 an ounce, up from $329.50/0.25 at Monday's close in New York. It had earlier risen as much as $4.50 an ounce.
On the foreign exchange market, the dollar fell to its lowest level on the euro and other major currencies since the start of the war. The dollar was down more than half a percent on the day against the euro at $1.0705 and the Swiss franc at 1.3745 francs . It was down nearly one percent against the yen, below 120 yen, after yen bears were disappointed the Bank of Japan took no radical steps to tackle deflation and weaken the Japanese currency at an emergency meeting on Tuesday.
Source: Yahoo News