The Short View: Uncertainty rattles markets

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The sharp fall in equity markets following the explosions in London on Thursday represented the classic knee-jerk response to uncertainty. The confused news reports, the wide scale of the attacks, and the disruption to transport and communications networks will have kept investors on edge. Although markets were not closed as they were after September 11, the London Stock Exchange relieved market-makers of their responsibility to make two-way prices.

The predictable market moves all occurred. Safe havens assets such as gold, the Swiss franc and government bonds all rose. The stock market falls replicated similar one-day declines that followed the bomb attacks on Madrid and Bali. The terrorist attacks may well have come as a particular shock for investors since it seems such a long time since an attack on Europe or the US had occurred. The “terrorism premium” that was priced into markets in the aftermath of September 11 seemed to have disappeared.

What matters for markets now is what happens next. If the attacks turn out to be a one-off, then markets will probably recover their composure after a few days. If, however, this heralds more regular attacks on the UK transport network, then one would expect the effect on UK investor sentiment to be more permanent. There may also be potential effects on UK consumer sentiment, which already seems to be in a sensitive state. Many people may be putting off shopping trips to London as a result. But we have seen in the past that consumers do eventually recover their willingness to spend.

Investor sentiment worldwide will clearly depend on whether there are other attacks elsewhere in Europe or in the US. It may well be that the developed world will have to live with occasional terrorist attacks of this nature, just as the UK had to cope with IRA attacks in the 1970s and 1980s. While Thursday’s attacks showed considerable co-ordination, they were not on the destructive scale of September 11, nor did they appear to involve chemical or biological weapons as some had feared. The economic impact, on areas such as insurance, ought accordingly to be far less than four years ago. For that small mercy, investors may be grateful.

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