Liam Dann: Terror attacks will spook markets

The terror threat following the weekend's dreadful attacks in Paris will bring a renewed level of risk to international markets and the global economy.

It is never comfortable to make the leap from real human tragedy to assessing economic and financial fallout.

But faltering economies create further misery and will put even greater pressure on political leaders to close borders and put up walls. And fallout is inevitable.

French President Francois Hollande is talking about "an act of war" and a "merciless" response.

These are words that should leave no one under any illusion that the ground has shifted in Europe - if not the world.

In Turkey this week world leaders gather for a G20 summit, now expected to focus on global security and the war on Isis.

Issues like deflation, debt and even climate change will be very much on the back burner.

There is a sense that these attacks may provoke a new level intensity from the world's major powers in their focus on the war is Syria and Iraq.

We may see more support for Russia and Vladimir Putin's efforts to wage all-out war.

Whether the military response is more aggressive, or the response to the refugee crisis less compassionate, remains to be seen.

The political stakes will be extremely high, particularly for leaders like Germany's Angela Merkel who have fought to keep Europe open.

There is now a serious risk that we see a response driven by fear rather than reason.

That's clearly what the terrorists want.

Fear shakes confidence and drives irrational behaviour. Markets tend to be volatile when the world enters a period of heightened terror risk.

After the attacks on the US on September 11 2001, Wall Street recorded one of its worst falls since 1987 - the Dow Jones plunged 7 per cent in one day. The US Federal Reserve cut interest rates in response.

In July 2005 after the London bombings the UK market initially fell sharply in response but bounced back quickly.

The immediate market reaction then, if not the scale of it, is reasonably predictable.

"The terrorist attacks in France will add to market anxiety and uncertainty," says Mark Lister, Head of Private Wealth Research at Craigs Investment partners in his outlook for the week ahead. We will see a "risk off" approach from investors.

"Expect equity markets to weaken, safe haven asset to strengthen and bond yields to fall. Defensive equities are likely to outperform cyclical and the US dollar will likely see further support."

The longer term consequences of these attacks are considerably more uncertain.

But the political crisis this could create in Europe would put more pressure on the fragile economic recovery.

The latest European GDP figures came out on Friday afternoon and showed growth at just 0.3 per cent for the third quarter - slightly worse than expected and buoyed only by reasonable domestic consumer spending.

Reduced travel by tourists and business people will bite as a growing number of countries advise their citizens to stay at home.

Heading into the crucial Christmas retail season, fears around crowded malls and major shopping precincts throughout Europe will weigh on consumer spending.

None of this will help those hoping for a return to strong growth and the creation of jobs and wealth in Europe - things that would ultimately create more capacity to improve the lot of refugees and immigrants.

But war, closed borders and potential political fragmentation pose an even bigger threat to longer-term economic growth for Europe, and this will weigh on global growth.

Europe now faces huge challenges on a truly historic scale. These are challenges we must share as they ripple around the world.