Global Market Loss Tops $US1 Trillion

September 19, 2001
By STEPHEN DABKOWSKI, GLOBAL MARKETS EDITOR

Global stockmarket losses in the week since the world was shocked by the terrorist activity that struck at the heart of Wall Street has now surpassed $US1 trillion.

To put the value of that figure in some context, it is equivalent to three times the annual output of Australia's total economy.

The value of Australian stocks are down $50 billion since the attack last week and in percentage terms local equities have been among the hardest hit in the world.

Already such loss of wealth represents the biggest calamity to hit investors since the 1987 stockmarket crash. Traders might have got through the first day's trading in New York with losses that were largely anticipated, but analysts are warning that we're only just beginning the "crisis" cycle.

Tim Riddley, chief economist of Alliance Capital Management, says there are normally two stages to market trauma. The first is the "uncertainty phase" in which investors move out of risky assets into cash. The second is the "recovery phase" in which the crisis ends. He admits the end could be three to six months away, as that's the normal cooling-off period after such a shock to the financial system.

"We know that financial markets are currently in the first stage, however, its duration remains unclear. This will be determined by political and economic developments, which are impossible to predict in the current environment," Mr Riddley said.

"However, the fragility of the US consumer and global equity markets suggests that financial market weakness is likely to continue until the potential for significant conflict dissipates," he said.

That's what concerns stock traders - they don't know what's likely to happen over the next week or two and they worry that investors will suddenly wake up in 10 days' time and realise that the US stock market has lost 15 to 20per cent of its value in incremental falls, an outcome that represents a stockmarket crash.

That's when US consumers could begin to dramatically alter their spending patterns and send the economy into recession.

"People are concerned, but they're not panicking. If stock prices continue to trend lower, we have to worry more," one US analyst was quoted as saying at the end of US trading yesterday.

David Hale, global chief economist of Zurich Financial Services, said that after "other great shock events such as Pearl Harbor, the Kennedy assassination and the Iraqi occupation of Kuwait, stock prices fell for several days".

"As a result of the great uncertainties that still linger over the question of US military action in the Middle East or central Asia, the odds are high that the US equity market will remain nervous despite the Federal Reserve easing," he said.

Mr Hale said there was now a strong chance the shock to US confidence would drive the world economy into recession in the coming months.

"The magnitude of any downturn will depend upon military events which are still unfolding and on their impact on the oil price," he said.

"In short, the US now appears to be heading for a more classic business cycle than appeared likely only 10 days ago. The downturn will be more severe than it has been so far, while the upturn could be more V-shaped rather than L or U shaped," Mr Hale said in a briefing note to investors yesterday.

Ivan Colhoun, Deutsche Bank's chief economist, says Monday's trading on Wall Street was "somewhat artificial" and not a true indicator of where prices might ultimately head.

He said the market had everything going for it - a coordinated cut in global interest rates, a lot of institutional and high-profile investors declaring they wouldn't sell and some companies buying their own shares - and the Dow Jones still fell by 7 per cent.

"As momentous as trading was on Wall Street on Monday, you cannot conclude after one night what's going to happen in the future," he said.

"If you can summarise the economic situation at present there is a much higher level of uncertainty, and with that goes a much greater risk for all investors," Mr Colhoun said.

Phil Ruthven, chairman of the economic research group IBIS World, puts a different spin on current events. He thinks US interest rates have been cut to such a low level that they will soon make equities attractive again, as investors weigh up the relative returns offered by fixed interest securities.

He says that with the US Federal Funds rate now returning only 3per cent interest, Wall Street "should hold its value around its current value for the next week or so".

" The break before the US market opened allowed traders to isolate the good and the bad, and that's what happened yesterday with traders marketing down stocks in sectors like airlines, insurance and banks," Mr Ruthven said.

But he believes overall market volatility isn't over just yet, with the US dollar now under pressure to tumble as investors pull their money out of US markets and invest them elsewhere in the world.

"The next shock is likely to hit the US dollar. The concern about the US holding interest rates so low is that they've got a huge current-account deficit to service, and they can only do that by attracting foreign capital. But that's becoming harder as US bonds lose their attractiveness. Something has to give, and the US dollar is likely to return to a more realistic level," he said.

That's good news for the beleaguered Australian dollar which, Mr Ruthven predicts, will be back at 65 US cents within two years.

http://www.theage.com.au/business/2001/09/19/FFXP2Z6LQRC.html