Global markets staged a swift turnaround yesterday as a war rally took hold in anticipation of an assault on Iraq. But shares and bonds were erratic and reflected continued uncertainty over both war and the outlook for the global economy when the fighting is over.
The turning point came in mid-afternoon European trading as ambassadors to the UN said there would be no vote on a second resolution. Investors interpreted that as an indication of an imminent attack and rushed to buy shares after a sell-off that had seen gold and oil prices rise.
On Wall Street, the Dow Jones Industrial Average was up 3.58 per cent or 281.65 points at 8,141.36 as investors bet on a short-lived and a swift and decisive US-led military strike against Iraq.
In Dublin, the ISEQ index was stronger in line with European markets but managed to make relatively modest gains. The ISEQ closed at 3,896.55, up 4.75 with dealers hoping the Irish market will make further progress today.
In London, the FTSE 100 closed 120 points up at 3,722 - its highest level for a month, and Frankfurt's Dax index closed up 84 at 2,487.
Mr Kevin Gardiner, director of equity research at Credit Suisse First Boston, said some long-term fund managers were buying shares in recognition that the market was oversold.
"All the big asset allocation decisions of the last few months have been reversed - there was a bond sell-off and the dollar strengthened," he said.
US analysts said much of the momentum in the market was coming from hedge funds and "short sellers" buying stock to close their positions after pushing the market downwards in recent weeks.
Global markets have had their sights on the outbreak of war since the start of the year, with many strategists predicting a rally. European markets are up 10 per cent from a six-year low a week ago - a recovery that took three weeks in the first Gulf war.
However, any upturn in share prices could prove shortlived as war will not remove analysts' doubts about the outlook for the world economy.
As the US waited for President Bush to issue an ultimatum to Iraqi president Saddam Hussein yesterday, analysts said some of the uncertainty that had kept markets volatile had been removed.
"The basic thoughts are that the conflict is likely to be on the short side," said Mr Jack Caffrey, equity strategist at JP Morgan Private Bank in New York.
Oil prices slumped as traders bet on a short military conflict, combined with the prospect that the United States would release oil from its emergency stockpiles.
Brent crude oil fell 78 cents to $29.35 per barrel on London's International Petroleum Exchange, which was forced to close for two hours when anti-war protesters raided the London market waving banners saying, "Oil fuels war." - (Financial Times Service/Reuters)
