The Short View: The fear is worse than the reality
The Short View: The fear is worse than the reality
By Philip Coggan, Investment Editor
Copyright The Financial Times Limited 2006
Published: July 5 2006 18:07 | Last updated: July 5 2006 18:07
The renewed resilience of financial markets was tested on Wednesday. News that North Korea had fired seven test missiles caused a decline in the Tokyo stock market and the yen, and some weakness in European stock markets, but the losses of equity investors were generally limited to about 1 per cent.
It clearly helped that the prospect of a North Korean missile launch has been around for several weeks. And the yen may well have been supported by widespread reports that the Bank of Japan would raise interest rates next week.
But investors seem to be relatively relaxed about geopolitical risk at the moment. In the case of North Korea, this may be because the missile launches are seen as attention-seeking – the diplomatic equivalent of a toddler’s tantrum. In addition, the launches were not perceived to be technical successes. Unlike a previous test in 1998, no missile flew over Japan.
The other big headache at the moment is the dispute over Iran’s nuclear programme. It is impossible to say how much of a premium the issue is adding to the oil price, but it may be part of the reason why crude has stayed above $70 a barrel.
Yet it is an issue that is rarely mentioned in strategists’ notes as determining the more general outlook for equities and bonds. This may be because investors do not believe that the US, so heavily embroiled in Iraq, can afford to take military action against another Middle Eastern country. Most assume that the prospect of imminent conflict is remote.
Indeed, the pattern in recent years has been that the fear of geopolitical risk has been worse than the reality. A big rally in equity markets started just before the invasion of Iraq as share prices shot up at the start of the 1991s Gulf war. The big market fall that followed the September 11 2001 attacks was not repeated after the Bali, Madrid or London bombings.
Does this represent investor complacency or simply a recognition that the economic effects of terrorist attacks are short-term? Perhaps, in a world of 24-hour news, investors have become immune to scare stories after worries such as the millennium bug and bird flu failed to develop momentum.
philip.coggan@ft.com
By Philip Coggan, Investment Editor
Copyright The Financial Times Limited 2006
Published: July 5 2006 18:07 | Last updated: July 5 2006 18:07
The renewed resilience of financial markets was tested on Wednesday. News that North Korea had fired seven test missiles caused a decline in the Tokyo stock market and the yen, and some weakness in European stock markets, but the losses of equity investors were generally limited to about 1 per cent.
It clearly helped that the prospect of a North Korean missile launch has been around for several weeks. And the yen may well have been supported by widespread reports that the Bank of Japan would raise interest rates next week.
But investors seem to be relatively relaxed about geopolitical risk at the moment. In the case of North Korea, this may be because the missile launches are seen as attention-seeking – the diplomatic equivalent of a toddler’s tantrum. In addition, the launches were not perceived to be technical successes. Unlike a previous test in 1998, no missile flew over Japan.
The other big headache at the moment is the dispute over Iran’s nuclear programme. It is impossible to say how much of a premium the issue is adding to the oil price, but it may be part of the reason why crude has stayed above $70 a barrel.
Yet it is an issue that is rarely mentioned in strategists’ notes as determining the more general outlook for equities and bonds. This may be because investors do not believe that the US, so heavily embroiled in Iraq, can afford to take military action against another Middle Eastern country. Most assume that the prospect of imminent conflict is remote.
Indeed, the pattern in recent years has been that the fear of geopolitical risk has been worse than the reality. A big rally in equity markets started just before the invasion of Iraq as share prices shot up at the start of the 1991s Gulf war. The big market fall that followed the September 11 2001 attacks was not repeated after the Bali, Madrid or London bombings.
Does this represent investor complacency or simply a recognition that the economic effects of terrorist attacks are short-term? Perhaps, in a world of 24-hour news, investors have become immune to scare stories after worries such as the millennium bug and bird flu failed to develop momentum.
philip.coggan@ft.com
posted by Carlos T Mock at 2:09 PM
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