A downturn transformed into disaster

In a totally connected world of markets that work closely with each other, the New York disaster was certain to send shock waves across the globe. Apart from the destruction of so much infrastructure in a critical hub, markets have been delivered one of history's heaviest blows.

In a totally connected world of markets that work closely with each other, the New York disaster was certain to send shock waves across the globe. Apart from the destruction of so much infrastructure in a critical hub, markets have been delivered one of history's heaviest blows.

When American equity trading resumes again tomorrow, emotions will play a leading role in the way shares perform. But added to the mixture will be the reactions and behaviour of markets around the world.

Almost without exception, the news of the unfolding events threw traders into a mass panic. As trading days closed, all benchmark indices found themselves nursing massive wounds. London, Frankfurt, Paris, Hong Kong, Tokyo, Sydney and Brazil were just a few of the major exchanges that found themselves down by hundreds of points.

This behaviour is nothing new. Historically, disastrous events have triggered indiscriminate sell-offs by traders whose knee-jerk reflex is to take the cash and watch as the news unfolds. American traders, despite their pride in their market and their feeling that it is a patriotic duty to keep the markets running in an orderly fashion, face an uphill task.

In Korea, the benchmark Kospi index fell 12 per cent on Wednesday. Both the Hang Seng and the Singapore index crumbled almost 9 per cent and even China, whose stock market has been resilient throughout the wider economic slowdown, tumbled an unprecedented 4.2 per cent. Tokyo, whose markets nursed wounds that had taken it down to 17-year lows, dropped 682 points to close at the lowest level since December 1983. Big stocks fell by their daily trading limit.

But the US may take solace from the positive behaviour of the markets in the rest of the week. Trading was always going to be volatile but the basic direction took markets from Europe to Asia to South America up at least part of the way they had fallen.

By the end of the week, it emerged that markets were already trading on the kind of information that had influenced them in the past. Company news, including word of which corporations will suffer the worst, was starting to show in the rapidly moving stock prices. BA, for example, slid 11 per cent on wider fears of the implications for the airline industry.

One big talking-point in New York and on Europe's trading floors is whether the disaster has pushed America into the abyss of recession. In New York, even the most optimistic traders could not help noticing Deutsche Bank has turned very gloomy on the prospects of recovery this year, or even well into 2002.

One Merrill Lynch broker said: "You have to accept it is very difficult for most of us to make rational judgements at the moment. We have all lost friends and colleagues. But our job is to try to work these markets out and at the moment you have to assume the long-term trend is going to be negative. This has been a catastrophe but nobody will forget that America was headed for a serious downturn anyway."

The commodity markets were particularly volatile in the immediate aftermath of the disaster. Aluminium, copper and nickel soared, although trading was thin because there was no contribution from America. That proved short-lived, as did the sudden spike in the gold price. Gold has traditionally been the safest haven for investors. It can be transported easily and its price has been relatively stable in a drastically uncertain world. But as Mike Lenhoff, chief strategist at Gerrard, said: "I'm not sure there will be sustained interest in commodities now."

He did, however, go on to say that depending on the future behaviour of the US, metal prices could turn bullish again. Declaration of war, for example would create a huge demand for materials, as would the announcement of big reconstruction efforts in the downtown Manhattan area.

Barton Biggs, a strategist at Morgan Stanley, said: "I think this is a buying opportunity on a trading basis. It may be a horrible event but it's not a systemic event. It's a specific event that will have specific consequences."