Bin Laden death and merger talk lift markets

GLOBAL STOCKS enjoyed a moderately bullish session as the news of the death of Osama bin Laden, merger activity in the US and some encouraging economic figures combined to keep momentum positive.

However, trading was volatile elsewhere as an initial rally for the dollar fizzled out and oil prices rapidly recovered from an early sell-off. Activity was subdued by market holidays in the UK and several Asian centres.

Most analysts believed that the death of the al-Qaeda leader would have only a short-term effect.

“Apart from an initial euphoric reaction in risk assets, we wouldn’t suspect the killing of bin Laden to have any long-term financial market impact,” said Sacha Tihanyi, senior currency strategist at Scotia Capital.

But others pointed to its effect on the US political and fiscal outlook. “In the long term, this has improved president Obama’s chances to get re-elected,” suggested Philip Marey at Rabobank.

He said this meant the likelihood of Republican plans for budget deficit reduction becoming reality had decreased. “The budget fight between those who want to preserve the US welfare state and are willing to raise taxes [Democrats] and those who want to radically alter the welfare state and lower taxes [Republicans] is likely to continue for years.”

Jim O’Neill, chairman of Goldman Sachs Asset Management in London, said the immediate consequences were “a positive repricing” of US markets.

“Beyond this immediate reaction, markets need to be careful as bin Laden has possibly not been the single biggest security threat directly for many years, and those who will regard him as a martyr won’t give up as a result of his killing,” he said.

In the currency markets, the dollar’s initially buoyant performance proved short-lived as yield differentials between the US and elsewhere reasserted their hold over sentiment.

The latest data on US manufacturing did little to alter market perceptions that the Federal Reserve would retain its accommodating monetary policy stance for some time.

The US Institute for Supply Management’s index of manufacturing activity eased to 60.4 in April from 61.2 in March.

“This report indicates some slowing in national manufacturing growth in April from the highs of February and March,” said Nicholas Tenev, economist at Barclays Capital.

“However, expansion in the sector is continuing at a healthy clip, and the resilience of the employment index is a particularly encouraging sign of widespread manufacturing payroll growth.”

The equivalent report for the euro zone, however, served to heighten expectations that the European Central Bank would continue its tightening cycle.

“By showing ongoing robust euro zone manufacturing activity and rising price pressures, the purchasing managers’ survey reinforces belief that the ECB will pull the interest rate trigger sooner rather than later,” said Howard Archer at IHS Global Insight.

Commodity prices saw extremely choppy trading as investors digested the day’s events.

Brent crude oil fell as low as $121.67 a barrel, down more than $4 from Friday’s close, before recovering to trade 57 cents lower at $125.32. West Texas Intermediate, the US crude benchmark, bounced to its highest level since 2008 but then retreated.

Gold struck a record high of $1,575 an ounce in Asian trade, but fell back even before the news of bin Laden’s death. The precious metal recovered some of its losses to trade at $1,564 by the New York mid-session.

US equities see-sawed in spite of a slew of initially well-received deal news. By midday in New York, the SP 500 was up 0.2 per cent at its highest level since 2008.

The pan-European FTSE Eurofirst 300 index ended a fraction higher, although the Nikkei 225 Average in Tokyo jumped 1.6 per cent. US government bonds erased early losses, with the yield on the 10-year Treasury down 2 basis points at 3.27 per cent. – (Financial Times, News wires)

Market round-up: Closing prices

Dow Jones:12,807.36 (–3.18) S&P 500:1,361.57 (–2.04) Nasdaq:2,861.84 (–11.70)