THE BOTTOM LINE:Moderate Europe Selloff Seen On US Reopen
By Maria Daly
Of DOW JONES NEWSWIRES
LONDON (Dow Jones)--European stocks are expected to slide lower when U.S.
markets resume trading after Tuesday's terrorism amid uncertainty about the
impact of the attacks on the economy and the scope of the retaliation, but
most expect losses to be limited because of the assurances by central banks
and institutions to support the global financial system.
The last thing the Federal Reserve wants is a major stock market selloff
when trading restarts Monday. Many analysts expect the Fed to cut interest
rates by at least half a percentage point before trading resumes to help
bolster consumer confidence and support stock prices. And there are reports
that financial companies have agreed to buy shares if there's evidence of a
mass selloff.
"If the Fed cuts rates, then the Dow (Jones Industrial Average) will
probably not fall below 9000 (from 9405.51)," said one trader at a German
investment bank.
In this case, he said European markets would fall but not dramatically.
Many analysts also expect European central banks to follow suit with a round
of interest rate cuts, if only to boost consumer sentiment in Europe.
"We only need to look at what happened in the U.K. on Wednesday," Peter
Cartwright at Williams De Broe said of the restart of U.S. trading. The
market was volatile but ended the day up 2.9%.
"There were a number of actors (central banks and financial institutions)
that came in to save markets," he said. "And already in New York our
arbitrageurs have been telling us that there will be a concerted effort on
behalf of the Fed to put money into the market and a concerted effort to
stop short selling as the big institutions will reign in how much stock they
lend."
This, he said, will limit the scope of the short players and hedge funds,
and the ability of these investors to drive markets lower.
Many analysts say the insurance and consumer cyclical sectors in Europe have
already been marked down in response to the devastation in New York and
Washington. If U.S. markets fall modestly, then most of the losses are
already priced into European shares.
"Of course, if the S&P falls 500 points when they reopen, then that's a
different scenario," one trader warned.
The Treasury market reopened Thursday and rallied, which "speaks against
stocks," said one trader. Big institutions are shifting to more conservative
strategies, and hedge funds will likely sell equities, he said.
Tom Hougaard of Financial Spreads, a U.K. spread betting company, forecasts
that the DJIA will fall around 300-350 points when trading resumes. Although
that's a big fall, it would be much less than the 550-600 points drop
traders initially expected.
$120 Billion Injection
In the immediate wake of the U.S. disaster, markets around the world
suffered as fears of an impending liquidity crisis gripped investors. Soon
after, however, Asian and European equity markets stabilized, helped by a
massive injection of liquidity - totaling $120 billion - from the Bank of
Japan, European Central Bank and the Fed.
Liquidity smoothes out jumpy markets by providing banks with extra funds to
ensure settlement of accounts.
"This has helped stabilize European markets, but there still remains
tremendous uncertainty about market direction and an unwillingness to
extract profit from disaster," said Nomura Securities strategist Sonja
Gibbs.
The sectors most likely to be adversely affected in the U.S. are the same
that have been adversely affected in Europe this week - airlines, hotels,
leisure and retailing. Constructions and drug stocks are seen gaining.
According to analysts at UBS Warburg, both the airline and hotel industries
were already weakened by the global economic slowdown, and the U.S. attacks
make a bad situation worse.
But the outlook is far from clear.
"In a sense we are operating in a vacuum," says Mike Lenhoff, chief
portfolio strategist at Gerard. "We have no information on what the actual
impact will be in terms of U.S. economic growth and whether the world's
largest economy can withstand recession."
Waiting For War?
The longer term picture is even more complicated, he said, as people try to
gauge the political and military reaction to the attacks in the days and
weeks to come.
Khuram Chaudhry, strategist at Merrill Lynch, said financial markets are
good at discounting financial news but are far less astute with political
news.
The threat of war is bound to have a negative impact on consumer and
business confidence, which would increase the chances of an economic
downturn and postpone any recovery.
Even before Tuesday's attacks, consumer confidence in the U.S. was already
on the wane. The University of Michigan Mid-September index of consumer
sentiment, which was released Thursday and tracks confidence through Monday,
Sept. 10 - the day before the terrorist acts occurred - fell to 83.6 from
91.5 in August.
According to strategists at Morgan Stanley, equities haven't hit the bottom
in Europe. Share prices here won't until U.S. consumer confidence cracks and
investors capitulate.
Economists are now saying the U.S. economy will likely tip into recession in
the second half as consumers reign in spending, and that will spill into
rest of the world. But analysts in Europe there will be no meltdown because
central banks will provide liquidity and oil supplies appear to be stable.
The consumer confidence that has supported much of the global economy will
be put to the test over the coming months - and European markets are
anxiously watching.
-By Maria Daly, Dow Jones Newswires; +44-20-7842-9308;
maria.daly@dowjones.com
-0- 17/09/01 09-03G
(END) DOW JONES NEWS 09-17-01
05:03 AM
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