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Global financial markets have dropped steeply since the recent terrorist attacks on the United States, with further losses coming yesterday as the U.S. Dow Jones index suffered its greatest one-day loss, giving up 684 points.
A global capital crunch may ensue as investment moves out of productive assets, further depressing the global economy and putting major economies in Asia and Latin America at risk of financial meltdown.
The unprecedented attacks on New York and Washington, D.C., Sept. 11 pierced the heart of the U.S. financial system, and its reverberations are already being felt on the world’s financial markets. The confidence of the global financial system has been severely shaken while the financial market infrastructure has also been damaged.
The short-term impact on financial markets will be a flight of capital from global stock markets as investors seek to put their money into safe havens, primarily commodities such as gold and grain, oil futures and stable products such as treasury bills and certain bonds. The longer-term impact will be felt as New York attempts to piece back together the intricate financial plumbing that allows money and capital to move efficiently throughout the globe.
A steep drop in share values appears imminent, as panic selling leads to financial contagion. Markets will also suffer from the crippling of much of New York’s trading infrastructure, which could develop into a global credit crunch that would put the brakes on business investment and push the global economy into recession. Several countries with large external debts are particularly vulnerable, including Argentina, Brazil, Turkey, Japan and South Korea, and could be the first victims.
The primary concern among financial analysts is U.S. markets, which attract nearly two-thirds of global capital flows, according to Reuters. These markets have been temporarily spared by the suspension of all trading activity in the United States, including U.S. bond markets.
This effect of the expected dumping will be particularly severe in the insurance, banking, financial and airline sectors, which were directly affected by the attack. Insurance industry executives quoted by the Wall Street Journal estimated property damage above $5 billion, and total damage as high as $20 billion. Insurance companies will struggle to meet property damage, worker compensation, business interruption and liability claims resulting from the disaster.
Drops in these sectors and others such as U.S. automotive firms, which closed their headquarters and numerous factories after the attacks, and will have parts supply lines disrupted, may precipitate a larger investor panic.
Worse yet, foreign investors betting on a decline in the dollar may flee the U.S. market temporarily. Such capital flight will put downward pressure on the dollar, ensuring further declines.
Capital flight from the United States will add to major drops in both established and emerging stock markets in other parts of the world. The first signs of this emerged Sept. 11, when major Latin American markets that remained open for several hours following the attacks on New York and Washington dropped from between 5 percent and 10 percent. Brazil’s Bovespa stock index was at a 23-month low when trading was finally halted.
Though most European markets closed soon after the attack, panic selling had already led to steep declines. London’s FT-SE 100 Index closed down 5.7 percent and France’s CAC 40 lost 7.4 percent, the biggest declines since the market crash of October 1987. The Frankfurt DAX closed early in response to a fake bomb threat but still suffered a record one-day drop of 8.5 percent, largely on the back of insurers like Munich Re and Allianz AG, which were down 15.5 percent and 12 percent respectively.
All of Europe’s financial markets were open Sept. 12, and indexes fell further as panic selling gave way to real concerns about the impact on the U.S. economy. Drops were smaller than during the previous day, however, since Europe is waiting for a reaction from American market while the European Central Bank intervened with a $63 billion capital injection.
Asian markets, the first to open for a full day of trading on Sept. 12, have so far born the brunt of the panic selling. Japan’s Nikkei 225 stock average fell 6.6 percent, dropping below 10,000 for the first time since August 1984. Hong Kong’s Hang Seng Index dropped by 8.9 percent and Singapore’s Straits Times Index fell 6.1 percent. Anticipating the carnage, Taiwan, Malaysia and Thailand suspended trading Sept. 12, and South Korea delayed its opening by three hours; when it did open, shares plummeted 12 percent.
Driven by concerns of a drop in U.S. consumer confidence, companies that export heavily to North America led the declines in Asia. Japan’s Toyota and Canon and China’s Legend Holdings were among the companies that suffered heavy losses. This bodes poorly for South Korea, which depends heavily on U.S. markets for exports.
These drops in stock value will affect more than investors’ portfolios. With capital flooding into the security of bonds, commodities and cash holdings, and bank balance sheets in countries like Japan undercut by stock losses, a severe capital crunch could ensue. This will make business financing more expensive and stifle business investment needed to keep economies growing.
Already the Bank of Japan and the European Central Bank have pumped $80 billion into money markets to keep them liquid and functioning, according to Bloomberg. Other National Reserve Banks from Australia to South Korea have pledged to provide additional liquidity. But the ability to put government capital into markets will be difficult for countries like South Korea, Indonesia, Turkey and Argentina that carry heavy loads of external debt.
Adding to the difficulties is the fact that increasingly integrated global financial markets, as well as banks, are heavily reliant on the Manhattan financial district for a wide range of trading and back-office operations. Brokerage services, market making, securities processing and settlement, and check and electronic payment processing have all been severely disrupted by the tragedy in lower Manhattan.
Commodities trading will also be disrupted. The floors of the New York Board of Trade, located at 4 World Trade Center, which trades coffee, sugar, cocoa, cotton and orange juice futures, is buried beneath the debris of the collapsed towers, Reuters reported. The New York Mercantile Exchange, which trades large amounts of petroleum and precious metals, is very close to the attack site and will be disrupted as well.
Morgan Stanley Dean Witter & Co., one of the world’s largest brokerage firms, was the Trade Center’s largest tenant and occupied about an eighth of the twin towers’ office space. Another important tenant was Cantor Fitzgerald LP, which handles about a quarter of U.S. government bond trading.
Other financial heavyweights with large operations in and around the World Trade Center include Lehman Brothers Holdings Inc., Credit Suisse First Boston, American Express Co., Deutsche Bank AG, Nomura Securities, Merrill Lynch & Co. and Dow Jones & Co. Numerous smaller brokerages, securities and law firms, investment banks and insurance companies were also housed in the World Trade Center complex.
Industry analysts believe that the overall financial market infrastructure in New York – which benefited from sophisticated emergency and backup procedures – will rebound fairly quickly. But specific companies that suffered large losses in the attacks will suffer the much longer-term impacts.
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