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The US crisis day 2

Thursday, September 13th 2001, 3:54PM

The US Crisis Day 2

1. Questions & Answers

Q1 Can we gain a perspective on the tragedy - are there any historical examples that may help us to understand the implications for financial markets?

A1 Two key issues are (i) the closure of the US stock markets - not since World War II has the New York stock exchange been closed for two straight days; and (ii) the subsequent performance of US markets after the event. The following table summaries the impact major world events have had on the Dow Jones and the recovery time measured as 22, 63 and 126 days.

 

DJIA Percentage Days After Reaction

Event

Dates

Reaction Dates

Date Range

% Gain/Loss

22

63

126
Fall of France 05/09/1940 - 06/22/1940

-17.1

-0.5

8.4

7.0

Pearl Harbour 12/06/1941 - 12/10/1941

-6.5

3.8

-2.9

-9.6

Truman Upset Victory 11/02/1948 - 11/10/1948

-4.9

1.6

3.5

1.9

KoreanWar 06/23/1950 - 07/13/1950

-12.0

9.1

15.3

19.2

Eisenhower Heart Attack 09/23/1955 - 09/26/1955

-6.5

0.0

6.6

11.7

Sputnik 10/03/1957 - 10/22/1957

-9.9

5.5

6.7

7.2

Cuban Missile Crisis 10/19/1962 - 10/27/1962

1.1

2.1

17.1

24.2

JFK Assassination 11/21/1963 - 11/22/1963

-2.9

7.2

12.4

15.1

U.S. Bombs Cambodia 04/29/1970 - 05/26/1970

-14.4

9.9

20.3

20.7

Kent State Shootings 05/04/1970 - 05/14/1970

-4.2

0.4

3.8

13.5

Arab Oil Embargo 10/18/1973 - 12/05/1973

-17.9

9.3

10.2

7.2

Nixon Resigns 08/09/1974 - 08/29/1974

-15.5

-7.9

-5.7

12.5

U.S.S.R. in Afghanistan 12/24/1979 - 01/03/1980

-2.2

6.7

-4.0

6.8

Hunt Silver Crisis 02/13/1980 - 03/27/1980

-15.9

6.7

16.2

25.8

Falkland Islands War 04/01/1982 - 05/07/1982

4.3

-8.5

-9.8

20.8

U.S. Invades Grenada 10/24/1983 - 11/07/1983

-2.7

3.9

-2.8

-3.2

U.S. Bombs Libya 04/15/1986 - 04/21/1986

2.6

-4.3

-4.1

-1.0

Financial Panic ’87 10/02/1987 - 10/19/1987

-34.2

11.5

11.4

15.0

Invasion of Panama 12/15/1989 - 12/20/1989

-1.9

-2.7

0.3

8.0

Gulf War Ultimatum 12/24/1990 - 01/16/1991

-4.3

7.0

19.8

18.7

Gorbachev Coup 08/16/1991 - 08/19/1991

-2.4

4.4

1.6

11.3

ERM U.K.Currency Crisis 09/14/1992 - 10/16/1992

-6.0

0.6

3.2

9.2

Trade Centre Bombing 02/26/1993 - 02/27/1993

-0.5

2.4

5.1

8.5

Oklahoma City Bombing 04/19/1995 - 04/20/1995

0.6

3.9

9.7

12.9

Asian Stock Market Crisis 10/07/1997 - 10/27/1997

-12.4

8.8

10.5

25.0

U.S.Bombings Africa 08/07/1998 - 08/10/1998

-0.3

-11.2

4.7

6.5

Russian LTCM Crisis 08/18/1998 - 10/08/1998

-11.3

15.1

24.7

33.7

Mean  

-7.1

3.8

6.8

12.5

Median  

-4.6

3.9

6.7

12.1

This data is by no means conclusive and the dates are subjective. However, the implication is that after an initial reaction to the tragic events, a recovery may be reasonably expected. Certainly this has been the mood of market with commentators noting the obvious market reaction to an event as catastrophic as this and the prospect for a re-evaluation after the initial shock has been absorbed.

Q2 Not withstanding the historical data, is this event likely to be the catalyst for a global recession?

A2  Before the attacks, the International Monetary Fund had expected global growth of 2.7% down from 5.0% last year. The US economy was already beginning to slow with only 0.2% growth in the second quarter. Before this catastrophe, the US Economy's future rested on whether layoffs would inhibit consumer spending, whether business investment would revive, and whether home construction and home prices would stay up. All eyes are now on the American consumer and their reaction to events. Whether a US-lead global slowdown - which arguably was in play in any event - is accelerated or not will become evident over the coming days and weeks as US consumers express their sentiment through spending and investing behaviour. If the MSN survey referred to in an earlier update is any indication, the prospects are positive.

An MSN survey held in the US at lunchtime on 11 September amongst 20,000 people asked the question: "How will the attack on the Unites States affect your financial security?" The following response was revealed:

  • I am deeply troubled 15%
  • I expect a significant impact 18%
  • I believe we are now over the low point 15%
  • I am moderately concerned but expect a rebound 51%

Q3 What steps are being taken by the world’s central banks to help stabilise market conditions ?

A3 The US Federal Reserve has said it would provide as much liquidity as the banks need and may lower interest rates if necessary. The European Central Bank said it also stood ready to provide liquidity to keep financial markets functioning. Japan's Ministry of Finance has advised that it stands ready to take appropriate foreign exchange action as necessary. A spokesman for OPEC, Secretary-General Ali Rodriguez, is on record indicating that OPEC is committed to meeting world oil demand and won't withhold oil following the attacks on the US. No reasonable world leader wants to see this catastrophe escalate and are clearly prepared to act if necessary.

Q4 When the US market does open, what is the likely impact on the different industry sectors.

A4 Again consumer reaction will be a key determinant. However, there are some obvious sectors that will suffer. Insurance companies will face claims that are expected to reach into the billions of dollars, making this the most costly man-made catastrophe in U.S history . Airlines, hotels and resorts and potentially big-ticket durable goods such as housing and cars may suffer in the short run. On the other hand, US defence, security and building contractors will benefit.

Q5 Fund Managers and Insurance companies have been forced to suspend trading in investment funds. Will this build-up in transactions contribute to selling pressure when the US markets finally open ?

A5 At TOWER Managed Funds, we have not seen a notable pick up in transactions. Those currently held are net purchase transactions with new applications exceeding redemption requests. The US market is expected to open on Thursday (US time) which will see only one additional day of accumulated transactions held. Mortgage Plus, Bond Plus, FirstRate and currency accounts were re-opened today. Early indications indicate that enquiry levels with mutual fund companies in the US have to date not exceeded normal levels.

This update was written by Tower Managed Funds.
Thursday September 13 7.00 am

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