Terrorism reared its ugly head again today, this time in London, the scene of a series of explosions this morning. In addition to more immediate concerns of safety, mourning the dead and caring for the injured, the lesser issues of what it means for the global economy and the world’s capital markets inevitably come seeping back into the minds of traders.
Among the first market reactions to today’s news from London was a sharp sell off in oil. From a record high of more than $61 a barrel at yesterday’s close in New York to trades as low as $57.20 early today, volatility is alive and kicking in energy. The initial reaction of some observers is that terrorism renewed (as if it ever really went away) would lessen economic growth around the world and thereby cut demand for crude.
The reaction among oil traders was similar in the months following the events of 9.11 suggest as much. Oil in New York was trading just under $28 a barrel before the planes hit the World Trade Center; by the end of the year, oil changed hands for considerably less, dipping to under $20. Terrorism has “a huge impact on the psychology of consumers,” Frederic Lasserre, the head of commodities research at Societe Generale SA in Paris, tells Bloomberg News today. “They become reluctant to spend, it has an impact on air travel, and at the end on oil demand. Today’s price drop is explained by the reaction to the September 11 attacks.”
Ed Yardeni, chief investment strategist of Oak Associates, also advises in an email message to clients today that “energy traders may be anticipating that global tourism is likely to be depressed during the summer holiday season.”
Informed or not, such views are having an effect in government bond trading today. The initial reaction to the London bombings in fixed-income land was to buy. That’s partly a safety issue, of course. Treasuries and government bonds elsewhere, after all, are considered a safe corner to park assets, at least in the short term. The prospect of a terrorist-induced economic slowing may be playing a role as well.
But let’s not get ahead of ourselves. Indeed, the oil market quickly recovered from its early morning sell off. Perhaps energy traders suddenly recalled that the U.S. economy, the world’s leading consumer of oil, surged after the dust of 9.11 settled. But while history has been known to rhyme, it never repeats. Indeed, the super-easy monetary policies of 2001-2003 are gone, as are the immediate stimulative effects of the tax cuts. Will that make a difference this time around? Grappling with a guess promises to be the topic du jour. But as this morning’s volatility in various markets suggests, consensus is nowhere to be seen at the moment.