European markets sink after explosions in London

LONDON (AP) - Stocks sank in Europe and the pound hit a 19-month low against the U.S. dollar after a series of explosions in London's transportation system, but analysts said market recoveries later in the day suggested the economic effects would be brief. 

Some investment banks in London evacuated buildings near areas where the bombs went off during the Thursday morning rush hour, but trading went on largely as normal. 

The stock exchange remained opened for business, but did ask traders to switch off certain electronic trading systems to prevent a more volatile response to the blasts, which killed at least 37 people in what Prime Minister Tony Blair described as a terrorist attack. 

The Bank of England went ahead with its monthly meeting to set interest rates, keeping the cost of borrowing at 4.75 percent. 

RBS Financial Markets economist Ross Walker said the reaction was "mature and quite rational,'' and noted that markets recovered much of their losses as police and emergency services gained control of the situation. 

The FTSE 100 fell 71.30 points, or 1.4 percent, to close at 5158.30, after being down nearly 200 points. Germany's DAX ended down 1.9 percent at 4,530.18, regaining 65 points, and in Paris the CAC 40 benchmark lost 1.4 percent to 4,220.62, after dipping as much as 4.5 percent. 

European Central Bank President Jean-Claude Trichet, speaking after the bank announced it would hold its main interest rate at 2 percent, said he did not believe the attacks "will have any serious impact'' on markets in the long term. 

Trichet said he had spoken with U.S. Federal Reserve Chairman Alan Greenspan and Bank of England head Mervyn King and concluded that financial systems were working normally. 

The Bank of England also kept its key rate steady Thursday at 4.75 percent. 

"We are alert, we are vigilant, we are monitoring all developments,'' he said. But he added that he saw "no particular information'' calling for action. 

Insurance and travel-related stocks were among the hardest hit in the initial slide as investors worried about the impact on people's willingness to travel. 

Hotels group Hilton fell 3.3 percent to 288.25 pence (US$5.02; euro4.22), and British Airways dropped 4.2 percent to 260.75 pence (US$4.54; euro3.82), as traders feared a downturn in the industry.  

Travel-related companies suffered heavy losses after the Sept. 11, 2001, attacks in the United States. 

German carrier Lufthansa fell 1.6 percent to euro10.17 (US$12.13) in Frankfurt, while tour operator TUI was down 1.2 percent to euro20.78 (US$24.79).  

French resort operator Club Med was 3.3 percent lower at euro38 (US$45.34). 

Shares in Munich Re, the world's biggest reinsurer, fell 2.4 percent to euro87.00 (US$103.80), while insurer Allianz dropped 2.7 percent to euro95.20 (US$113.58). 

Allianz AG said it was facing a euro1 million to euro9 million (US$1.2 million to US$10.7 million) exposure from the explosions because of its participation in a terrorist-risk coverage plan led by the British government.  

Munich Re said it was not involved in the terror insurance plan. 

British insurer Prudential fell 1.9 percent to 502.25 pence (euro7.39; US$8.82), while France's Axa was down 2.8 percent at euro20.60 (US$24.58). 

Shares in Swiss Re were down 2 percent at 78.35 Swiss francs (euro50.42; US$60.15). 

The company said it had substantially reduced its exposure to terrorism since the Sept. 11 attacks but was still assessing the possible effects of Thursday's events. 

Investment was switched into traditional safe havens such as government bonds, and the pound dropped as low as US$1.7403, its lowest point since December 2003. 

It recovered to US$1.7415 by late Thursday, still down from US$1.7567 in New York late Wednesday. 

The currency had been under pressure ahead of the Bank of England meeting. 

Gold closed in London at US$425.60 bid per troy ounce, up from US$423.60 on Wednesday. 

In Zurich the bid price was US$426.08, up from US$423.50. 

"As far as markets are concerned it is the uncertainty that will trouble people,'' said Steven Saywell, senior currencies strategist at Citigroup. 

"Obviously, it's a nasty incident and markets would look to know more about who was behind it, the wider situation and can we expect more of this.'' 

Walker said there would likely be a loss of consumer and business confidence in the near term in Britain, affecting economic indicators such as retail sales. 

Justin King managing director of C2i, a security firm that worked with corporate clients before and after the March 2004 terrorist attacks in Madrid, said those blasts had left London more "switched on'' to dealing with the aftermath and feeding information quickly to the public about the security situation. 

King said the biggest factor limiting the economic impact of the London blasts was that very little infrastructure was damaged, allowing businesses to return to work quickly. 

The biggest risk - other than more attacks - was to the confidence of the work force, at whom the attacks were directed, he said. 

But he added there were signs that most people would be returning to work Friday. - AP 

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