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Despite the terrible human cost, Thursday’s terrorist attacks were not London’s September 11. They serve as a reminder, however, of the geopolitical risks still threatening the world almost four years after the attack on the World Trade Center.

The fall in share prices, bond yields and the oil price, combined with a jump in gold, are a classic knee-jerk reaction. Initially severe market reactions to previous incidents proved shortlived. Following the Madrid bombing of March 11, 2004, Spanish equities recovered their losses by early April. Terrorists have not succeeded, either, in doing lasting damage to the real economy.

Today, however, markets look more vulnerable than ever. The world’s economic imbalances have mounted, with the US current account deficit now running at more than 6 per cent of gross domestic product. Far too much still depends on Anglo-Saxon consumers. The eurozone, meanwhile, remains stagnant and oil prices are at record highs. In addition, the economic rise of China has introduced another, potentially destabilising, factor, with protectionist sentiment rising on both sides of the Atlantic.

Simultaneously, the capacity of global leaders to initiate joint action continues to look limited given the personal acrimony between the main actors. Tensions over Iraq, the European constitution, world trade and China’s currency peg have all contributed to this.

Excess liquidity in the global monetary system has created bubbles, notably in housing. Even for equities, valuations are stretched relative to longer-term earnings, while bond yields are close to all-time lows. Investors hold unusually divergent views on fundamental economic prospects. In the awful event of a further, more devastating, attack, markets could prove more vulnerable.

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