Betting on a short war

International sharemarkets have rallied round the US flag, as investors bet that war with Iraq will be swift and certain.

In New York, stocks jumped more than 3.5 per cent on Monday (US time), the fourth day in a row that the market has risen.

Wall Street believes the war will end quickly and leave the US economy relatively unscathed.

The Dow Jones industrial average jumped 282.21 points or 3.59 per cent to 8141.92 and the broad Standard and Poor's 500 index climbed 29.52 points, or 3.54 per cent, to 862.79.

The gains came ahead of President George W. Bush's speech in which he demanded that Iraqi President Saddam Hussein surrender power within 48 hours or face military attack.

Bob Basel, senior trader at Salomon Smith Barney, said war was seen as positive for the market "only because it takes an indecisive situation and turns it into a more decisive ending".

If history repeats, the optimists may have a point; from the launch of the air campaign during the first Gulf war in January 1991, through to the end of that year, US share prices gained 37 per cent as measured by the Wilshire 5000 index, the broadest measure of the US market.

The latest rise is also fuelled by short sellers - investors who sell borrowed stock and hope to buy it back later at a lower price - rushing to buy back shares as the market rose.

Havens such as government bonds weakened and oil prices dropped, while the dollar strengthened against the euro.

The ripples from Wall Street's surge were felt in New Zealand, pushing up the NZSE50 index by 1.22 per cent yesterday.

The Australian market recorded its biggest one day rise since October 1997, with the S&P/ASX 200 index rising 3.5 per cent.

Across Europe the sharemarket indexes told the same story on Monday (local time).

The insurance and tech sectors, which are highly geared to the stock market, climbed more than 4 per cent and energy stocks also rallied.

Airlines such as Lufthansa and British Airways leapt 6.8 per cent and 7.1 per cent respectively.

In London, the FTSE100 index closed 3.35 per cent higher to finish the session at 3722.3, its highest close in three weeks.

Frankfurt's DAX index raced up 83.93 points or 3.49 per cent.

In Paris shares closed up 3.35 per cent as measured by the CAC-40 index, which has gained 14 per cent in two days, and in Zurich the SMI index closed 115.1 or 2.87 per cent higher.

As shares rose, oil prices fell.

Brent crude oil fell 65USc to US$29.48 a barrel on London's International Petroleum Exchange, which was closed for two hours when anti-war protesters raided the market waving banners saying "oil fuels war".

Speculative investors who fuelled a 60 per cent rise in oil prices in just over three months are now selling to avoid being caught out by a sudden price slide if Middle East oil flows escape severe disruption.

But while few were listening, there were warning signs that the sharemarket rally may not last.

"We continue to suggest that investors sell into [rallies] because of the many risks we think investors are ignoring," said Richard Bernstein, a chief strategist at Merrill Lynch.

Stock prices remained extremely high, he pointed out, and there was a 50/50 chance of a double-dip recession in the US.

After President Bush's speech, US sharemarket index futures fell, indicating that share prices might face renewed selling pressure.

And war itself might not appear so positive once it began, said Milton Ezrati, senior economic strategist for Lord Abbett.

"If it becomes a social or military nightmare, or he [Saddam] sets fire to the oil fields, the market will give back much if not all of the gains we've had over the past three to four days, as soon as it's evident."

* The New Zealand dollar looked set to slide below 54USc overnight as war loomed.

By 5pm yesterday the kiwi had fallen to 54.88USc, from 55.46USc at yesterday's local close.

"It's all been a US dollar story with Bush's comments," one local dealer said.

"The market knew what was going to be said today and they sold the euro down two big figures, they sold the aussie down 70 points, and they sold the kiwi down 70 points," he said.

"To me, it's been a case of buy the rumour, sell the fact, with the buying of the rumour having happened in the last three to five months.

"Now we're at D-day there may be a few people thinking, 'the risk is that it becomes a short war, and the US dollar recovers rather quickly and if that happens, we need to lighten our load'."

- REUTERS, NZPA

Herald Feature: Iraq