War and Wall Street
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PAUL SOLMAN: It all seemed so peaceful yesterday morning from the Bank of America offices in midtown Manhattan, Colin Powell preparing to speak at the U.N. about a mile away.
But the U.S. financial markets were on edge — battered by the uncertainty of war as they’ve lately been.
MICKEY LEVY, Bank of America: Conflict with Iraq is not necessarily bad for the economy, but markets just don’t like uncertainty.
PAUL SOLMAN: We were here with the bank’s chief economist Mickey Levy to see how the world’s investors in stocks, bonds, foreign exchange, and so on, would react to the brief for war, their collective bets changing world prices moment to moment.
SECRETARY OF STATE COLIN POWELL: As it did throughout the 1990s we know Iraq today is actively using its considerable intelligence capabilities to hide its illicit activists.
PAUL SOLMAN: Sec. Powell seemed to bring the war closer to home but not necessarily reduce uncertainty. Levy’s chief concern:
MICKEY LEVY: It’s very difficult to put probable built and superimpose it on any baseline economic forecast. So financial markets feel the uncertainty. It’s a gray cloud hanging over investment decisions.
PAUL SOLMAN: Powell played tapes showed pictures to prove his point. Iraq was hoodwinking the U.N. inspectors.
We looked in on Ciaran O’Kelly head of stock trading.
CIARAN O’KELLY: See the trend, the markets with Powell’s speech, at 10:30 and we can see the sharp gap higher, in the S&P futures. At this time in time the market is liking what it here’s. The vote of confidence by the markets in today’s speech.
PAUL SOLMAN: Confidence.. meaning?
CIARAN O’KELLY: Meaning taking out uncertainty. There is so much uncertainty in the marketplace, the equity markets have been paralyzed for the last five weeks. Arguably three, four months.
And the equity investors both large funds and the private investors want to know when the world is going to start again. When the world is upside down and there is uncertainty, do you really care continue to invest in – are you really going to try and struggle to find a right valuation for America Online for G.E.? Of course you don’t.
What do you focus on? You focus on your basic needs: shelter, food.
PAUL SOLMAN: So you just say, hey I’m just not going to invest, period
CIARAN O’KELLY: Correct, you’re on the sidelines. Your cash is under the mattress.
PAUL SOLMAN: Cash is under the mattress.
CIARAN O’KELLY: You’re cycling over the Brooklyn Bridge with a backpack.
PAUL SOLMAN: Resolving uncertainty – that was the hope throughout Bank of America yesterday; trader Andy Meehan, 11:30 A.M.
ANDY MEEHAN: The market is anticipating a $10-$12 immediate impact beyond regime change, down in oil prices.
PAUL SOLMAN: Is that right?
ANDY MEEHAN: Yes.
PAUL SOLMAN: So, you mean, today, oil is selling by how much a barrel?
ANDY MEEHAN: Well, today’s oil is $34.
PAUL SOLMAN: And the futures if you were going to buy oil?
ANDY MEEHAN: The futures — I’m on the curve right now but I’ll have a look. Estimates are ranging in the area of anywhere between basically $19, $23 a barrel for the second half of this year.
PAUL SOLMAN: The oil market seemed to be predicting a successful war months hence.
PAUL SOLMAN: But if the talk of war, or of course war itself, were to drag on, more uncertainty — uncertainty which had been battering by the way U.S. dollar — convincing investors to buy euros instead — right up until Powell’s speech.
BRONIA JENKINS, head of foreign exchange options: Normally the euro market is very active. During the speech everybody was very much listening as opposed to trading. We saw lot of euro selling. So people buying dollars on the back of his speech.
PAUL SOLMAN: Really?
BRONIA JENKINS: Yes.
PAUL SOLMAN: Head of foreign exchange options, Bronia Jenkins.
BRONIA JENKINS: If the war is over quickly, we will see a rally in the dollar.
PAUL SOLMAN: Why?
BRONIA JENKINS: Because the dollar has been weakening due in part, due to the conflict in Iraq. So if that gets results, people who have been buying euros and selling dollars, you’ll see people taking profit on that, followed by the fundamental taking over again once again in the euro rallying and the dollar weakening.
PAUL SOLMAN: By fundamentals, Jenkins means constant influences like trade deficit or interest rates but Dan Ponder of the junk bond desk reminded us we shouldn’t read too much to the effects of one speech — even if it’s as major as Colin Powell’s.
DAN PONDER: I mean, the speech for our market is short-term. All it means is how our market will trade in the short-term. It doesn’t have a long-term effect as far as how I look at a particular high yield.
PAUL SOLMAN: Unless the speech itself significantly altered the uncertain mood of markets. But by mid-afternoon the stock market had begun to dip uncertainty again in the air.
David Gottlieb, who helps take new medical firms public, bemoaned the fact his business still seemed to be frozen.
PAUL SOLMAN: But if you have got some great new technology and I assume there is some companies out there with just amazing technologies at this point, what’s going on with investors that means that they won’t fund these companies at all?
DAVID GOTTLIEB: Well, I think we’re facing now an environment where many public investors are able to assess the clinical and commercialization risks of emerging technology but they’re not able to discount into a valuation the uncertainty and broader economic and equity markets.
PAUL SOLMAN: So you can price risk — that is come up with some probability estimate but you can’t price uncertainty?
DAVID GOTTLIEB: I think that’s exactly right.
PAUL SOLMAN: Wall Street’s closing bell was fast approaching. The stock market up for a while but ultimately down — though less than one percent on the day.
U.S. bonds and the dollar both up a tad. In short, little movement said Ciaran O’Kelly. His final thought:
CIARAN O’KELLY: So the perception among investors is the world is at a standstill. The world is still at a standstill and the timing as to when the advent of war is still very unclear.
PAUL SOLMAN: To the extent then that uncertainty has been dampening the mood of the financial markets of late yesterday did nothing to restore Wall Street’s spirits.