July 7, 2005

London bombs impact world investment markets

by Brian Turner

Special Report

Four bombs were detonated at four different points in London’s transportation system during the morning rush hour on Thursday, leaving a reported 37 dead and more than 700 wounded. The attacks are being investigated as terrorist acts.

A group claiming links to Al-Qaeda claimed responsibility for the attacks and warned Italy and Denmark to withdraw their military forces from the Middle East.

The claim, which one police official said had not been determined to be real, appeared on an Islamist website.

Prime Minister Tony Blair, who left the G8 meeting in Scotland to deal with attacks, declared the intent of the British people to preserve their way of life and their values in the wake of the attacks.

Equity Markets

In the economic community, the equities markets bore the brunt of the reaction to the attacks.

In London the FTSE 100 ended the day down 1.4 percent at 5,158.3 after a 4 percent drop earlier in the day.

The FTSE 250 closed down 1.4 percent at 7,387.9.

The volume of shares traded on the day was much higher than average at 4.6 billion shares.

The news of the attacks in London prompted a broad-based sell-off, but by afternoon more limited losses in New York and the expectation that the attacks might prompt the Bank of England to cut interest rates helped the equities markets to recover somewhat from what had been a traumatic day.

Analysts praised the resilience of the London markets and predicted that within a week they would be higher than current levels.

Almost all stocks on the FTSE 100 were lower on the day.

Among those feeling the most effect from the bombings were travel-related sectors.

Air carriers and cruise lines were down, as were hotel groups. British Airways lost 4.2 percent to 260 ¾p and EasyJet fell 3.8 percent to 254 ¼p, while airport operator BAA declined by 3.2 percent to 599p.

Cruise operator Carnival fell 2.2 percent to £31.59. Hilton lost 3.3 percent to 288 ¼p, while InterContinental Hotels was down 2.8 percent to 701 ½p.

Shares in companies touching on bus and train transport were down as well.

National Express, which bought the London bus division of Tellings Golden Miller just last month, lost 3.3 percent to 880p, while bus and train operator Go-Ahead Group was down 2.4 percent to £12.48.

First Choice Holidays initially fell by 8.2 percent but recovered by the end of the day to a loss of 2.9 percent at 187 ¼p.

Leisure companies with significant holdings in London also fell sharply. Ubrium, the nightclub operator, lost 4.3 percent to 770p, while Caffe Nero, the coffee shop operator, was down 2.9 percent to 187 ¼p.

Another sector seeing significant losses in the London markets was the insurance sector.

Those firms had recovered much of their losses by the end of the day, however.

Aviva closed down 2.2 percent at 611p after having fallen to 585p earlier. Prudential fell to 482½p before recovering to 502 ¼p at the close of trade, a decline of 1.9 percent.

Gainers were few in London, and included pharmaceutical group Shine, which rose 0.2 percent to 620p, and Quadnetics Group, which supplies CCTV and video systems to London Transport. Shares in Quadnetics rose 1 percent to 242 ½p.

Eurozone markets

In the eurozone, the FTSE Eurofirst 300 saw an up and down day much like that in the London markets.

The Eurofirst was down by 1.9 percent to 1,135.6 late in the trading day, but it had fallen as far as 1,107.49 earlier, down 4.3 percent.

Again, the leisure and insurance sectors were the hardest hit, especially airline and travel stocks.

Tui, the world’s biggest travel agency, lost 2.3 percent to €20.59 even though a company officials said that it does not believe Thursday’s terrorist attacks in London will have a long-term effect on travel bookings.

In the air travel sector, Lufthansa lost 2.3 percent to €9.95, Air France-KLM was down 1.3 percent to €12.42, Sweden’s SAS fell 1.5 percent to SKr64.25, and RyanAir lost 2.3 percent to €6.32.

European insurers were also down, with life insurers Aegon dropping 1.8 percent to €10.76 and Alleanza falling 2.7 percent to €8.77.

Reinsurers did even worse, with Munich Re, the world’s largest reinsurer, lost 2.4 percent to €87, even though it said it was not affected by the attacks in London. Other reinsures were down between 1.9 percent and 4.1 percent.

Energy stocks in the eurozone were down after the price of crude oil initially hit record highs after the attacks but subsequently fell by more than $5 per barrel on concerns about the impact of the attacks on air travel and economic growth.

Royal Dutch was down 2.7 percent to €54.90, Norsk Hydro lost 2.9 percent to NKr619.50, and Statoil fell 2.1 percent to NKr140.50. Crude oil prices recovered most of those losses later in the day but still ended the day down.

US markets

US stocks initially dropped on the news of the London bombings, but then recovered as European stocks recovered some of their early losses as the day progressed.

The Dow Jones Industrial Average, S&P 500, and Nasdaq all ended the trading day in positive territory.

The DIJA gained 0.3 percent to close at 10,302.29, the S&P 500 was up fractionally to 1,197.86, while the Nasdaq composite also gained 0.3 percent to close at 2,075.66.

Early declines on the New York exchanges were about half of those experienced after the March 11, 2004 terrorist attacks in Madrid.

Another factor in the late recovery in New York involved the weekly report on first-time jobless claims in the US, which came in at just about the level expected.

Still, as in London and in Europe, airlines and other travel-related stocks fell on the day.

Delta Air Lines closed down 2.9 percent at $3.38, after recovering from a 10 percent drop in pre-opening trade. Meanwhile, Marriott International was off by 0.4 percent to $68.59.

Currency Markets

In the currency markets, investors looked for safe investments after the London attacks.

Trade activity went up in London about 9 a.m., calmed down on initial reports that the explosions could have been caused by a power surge, then peaked again around 9:40 a.m. as it began to be increasingly clear that the blasts were due to terrorist activity.

Volume sank again after 10 a.m. but remained higher than average all day. Sterling fell to $1.7403 in relation to the US dollar, an 18-month low, from $1.752 before the attacks.

By late in the day, however, sterling had rallied back slightly to sit at $1.743. The pound also dropped in relation to the Swiss franc. It fell to SFr2.243 before recovering to Sfr2.263 by the end of the trading day.

The US dollar was also down in relation to the Swiss franc, falling to SFr1.285 before recovering slightly to SFr1.299.

The dollar also dropped initially against the euro, but by late in the day in New York it had returned to its previous level of $1.194.

Analysts said that the US dollar has been very sensitive to news of terrorist attacks since the September 11, 2001 attacks in the US, even when the US or its interests are not directly involved.

Bond Markets

The price of government bonds around the world surged, and yields fell, as investors looked for safe places to put their money after the events in London on Thursday morning.

In the UK, the 10-year gilt lost 8.3 basis points to yield 4.199percent at the close of trade. Earlier, yields on the 10-year gilt had fallen to a two-year low of 4.12 percent.

In the US, the 10-year Treasury bond was down, although not as much, losing 2.5 basis points to yield 4.049 percent, after falling to a yield of 3.96 percent earlier in the day.

In the eurozone, the 10-year German Bund registered a loss of 3.6 basis points to yield 3.175 percent after bouncing back from an all-time low of 3.08 percent. Trade was heaving at 1.4 million contracts in the eurozone.

Some analysts said that as long as confidence remains high in Europe, the London attacks will not have an effect on the overall economic outlook for Europe.

Crude Futures

The price of crude oil saw wide fluctuations in the wake of the attacks in London.

Before news of the explosions, Brent crude oil on the International Petroleum Exchange in London had reached a record high of $60.70 per barrel.

After the news of the attacks, however, Brent crude dropped $5.15 in the space of two hours, to $55.55.

By the end of trade, however, Brent had recovered to $59.28 per barrel, still down 57 cents from Wednesday’s close.

West Texas Intermediate ended the day 55 cents below Wednesday’s close at $60.73 per barrel in New York.

It had hit a new record high of $62.10 per barrel early in the day but dived to a low of $57.20 per barrel before recovering to its price at the close of trade.

Analysts said that the steep drops in crude oil prices had to do with fears that the day’s events were going to take on proportions similar to the September 11, 2001 attacks in New York.

Right after 9/11, oil prices jumped by $1 per barrel before falling for the rest of the year because of a slowed economy and a huge drop in air travel.

The price of gold was also affected by the London attacks, jumping by $4 on the news, only to fall back to $425.05/$425.80, still a gain of $2 on the day.

The Asian markets had closed before the attacks in London took place, and so were not affected by Thursday’s events.

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