World stock markets surged yesterday, with trading buoyed by a robust overnight showing on Wall Street, which feels that a US-led war on Iraq is definitely on, but would be a short one.
Over the past three months, world stock markets had been spooked by the uncertainties over when the war would start. Now that the overhang has been removed with the firming of the timing for a possible attack, world stock markets are popping up like coiled springs.
The huge expectation in world stock markets of a short war with minimum problems, lasting between two to three weeks, with a US-led victory prompted investors to move back into equities.
Indeed, the strategy of most research houses is for their clients to take positions now, if they want to ride the rally after the war. This indicates that investors expect markets to rally as they did in the first Gulf War in 1990. Then, market players bought shares when the first bomb fell on Iraq.
This is based on history, but no one can really tell whether it would be a short war, for there could be repercussions leading to a prolonged war,'' said an analyst with a foreign brokerage.
AmResearch executive director Gan Kim Khoon said that it was the hope factor of a short war, hence the upbeat sentiments globally.''
On Tuesday morning (Malaysian time), US President George W. Bush triggered a 48-hour global countdown to war by demanding that Iraqi President Saddam Hussein and his sons leave Iraq or face an invasion.
Wall Street reacted positively to this announcement, with the Dow Jones Industrial Average closing 3.6% or 282 points higher at 8,141 on Monday. Nasdaq rose 52 points to 1,392.
European stock markets also opened higher on Wall Street's bullishness. At press time, the London stock market was trading 31 points higher at 3,753, the Paris bourse was down 8 points at 2,823, and Germany's was up 82 points at 2,569.
The bullish impact of Wall Street triggered Asian markets to also close higher yesterday. Tokyo's Nikkei was up 82 points to 7,954, Hong Kong's Hang Seng recorded a higher gain of 237 points to 9,041, while the Taipei Weighted Index surged 181 points to 4,539.
The KLSE Composite Index closed off its high at 627, up 4.5 points on the back of buying by some institutional investors. But big cap stocks such as Tenaga Nasional Bhd, Telekom Malaysia Bhd, and Maybank Bhd closed in negative territory.
Although world markets were buoyant, the biggest upward moves were seen in sectors that had suffered the most recently, such as airlines, technology, insurance and cyclical stocks.
Stock markets basically hate any form of uncertainty. It is sad and a perverse action that the stock markets are rising now that there is certainty of a war, but this is typical of stock markets.
With uncertainty we cannot plan. Now the issue is how long the war will last,'' said an analyst, who is convinced that the military action on Iraq would come as early as this week.
And despite the sudden enthusiasm gripping markets, analysts have warned that any further rally in the coming days would likely be extremely volatile.
Although a swift resolution to the war may boost the stock markets and economies, let us not forget that the world economies, especially that of the US, Germany and Japan are looking distinctively sick and any hike in crude oil prices with a prolonged war could have an impact on global economies, with stock markets reacting negatively,'' an analyst said.
Crude oil prices slumped after Bush issued the ultimatum on Monday. The slide continued yesterday and Brent crude futures fell 10% or US$3.08 to US$26.40 per barrel. Front-month US crude oil fell US$3.03 to US$31.90 a barrel.
But some analysts said the fall in crude oil prices appears to be a signal that the impact of a short war on world economies would be minimal. But the main risk to crude oil remains if Iraqi oil fields are destroyed.
During the first Gulf War, crude oil prices dropped from over US$30 to barely US$20 per barrel.
Aside from oil, gold markets were also shaken. The US dollar also surged to 119.06 yen, which is its biggest gain in two months.
Despite the enthusiasm, market players would also be looking for clues to the direction of US interest rates and the economic outlook after the Federal Open Market Committee meeting on Wednesday morning (Malaysia time).