In the short term there could be some volatile movements as a result of settlement and liquidity pro...
In the short term there could be some volatile movements as a result of settlement and liquidity problems. It is virtually impossible to predict these movements over the next three to four days. All we can say is that Central Banks will be as accommodative as possible in an attempt to avoid any escalating liquidity worries.
The medium term effects are rather more important. The US economy has been slowing and has not yet responded to this year's interest rate cuts. This event will clearly be a blow to US consumer confidence at a time when the consumer was already beginning to falter. The probability of a US recession has therefore increased. While our forecasts for economic growth in US were already below consensus, we would expect to cut our growth forecasts further - possibly by as much as 0.5%.
The US authorities will obviously be anxious to avoid any form of financial crisis. They do not want the world to perceive that terrorism can achieve wide spread economic disruption in addition to the human toll. There will, therefore, be every attempt to stimulate the economy and we anticipate that the Fed will cut official interest rates by at least 0.5% in the near future. We may also see further interest rate cuts elsewhere in response to the crisis.
OPEC have said that they will try to maintain adequate supply of oil and deliver stable oil prices. We therefore expect that any significant rise in the oil price will be temporary. With the economy set to deteriorate further the low inflation outlook remains in place.
The US dollar has become more vulnerable. Capital flows into the US had already begun to diminish, causing some weakness of the US dollar. The recent events may cause foreign investors to reassess their investment plans and question the safe haven status of the US dollar.
In summary, the economic impact in the US is for lower growth and interest rates than would otherwise have been the case, as well as a significant blow to confidence. These effects will be felt to a lesser degree in other economies. Not surprisingly, stock markets have fallen sharply around the world. In valuation terms, however, the markets we have been favouring, such as the UK, still look cheap.
A look back at how markets have responded to past tragedies and military action shows that investors who sold their investments prematurely lost money when markets subsequently rebounded.
Those investors who have made money in the long term have done so by riding out the downturns in equity markets and taking a long-term view of their investments. Stock and shares, along with life and pension policies should always be considered as long-term investments for the future.
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