As happens so often in markets, optimism generated by one event can be quickly off-set by associated downside risks. Initial cheer on Sunday night in the US over news that US forces had killed Osama bin Laden in his Pakistan stronghold was overtaken by concerns about retaliatory action and longer-term challenges. Stocks went up, then down, commodities fluctuated and ‘safe-haven’ currencies eventually benefited.
Accordingly, the “Bin Laden death rally” — as it was dubbed in equity markets — fizzled nearly as rapidly as it began in thin trading on a Monday when key markets including Japan and the UK were closed for holidays.
As the FT reported, late on Monday:
Wall Street was unable to hold early gains fuelled by news of the death of Osama bin Laden, merger activity in the US and some encouraging economic figures.
Trading was volatile elsewhere as the dollar, gold and oil prices swung back and forth between losses and gains.
The dollar faded after an initial rally, touched a three-year low, and was slightly higher late in New York, its first gain in 10 days.
Activity was subdued by market holidays in the UK and several Asian centres.
Most analysts took the view that the death of the al-Qaeda leader would have only a short-term effect.
“Apart from an initial euphoric reaction in risk assets, we wouldn’t suspect the killing of bin Laden to have any long-term financial market impact,” said Sacha Tihanyi, senior currency strategist at Scotia Capital.
However, as the FT noted, other commentators and analysts are taking a much longer-term view — not least on the overall impact of the news on the US political and fiscal outlook.
Philip Marey of Rabobank told the FT that in the long term, it improved President Barack Obama’s chances of being re-elected. That, in turn, reduced the likelihood that Republican plans for budget deficit reduction would become reality.
More’s the point, as FT columnist Philip Stephens noted, “Obama has never had a better chance to seek a political resolution to the war in Afghanistan”.
Overall, as Pimco’s Mohamed El-Erian, wrote on FT Alphaville on Monday, in net terms, the markets are likely to treat the dual implications of the bin Laden news — of “a durable reduction in security threats and some possibility of isolated disturbances” — as involving a net overall reduction in risk premiums. This, he predicted, would “bolster equity prices worldwide while placing some pressure on those government bond markets that traditionally benefit from flight to quality”.
On foreign exchange meanwhile, Citi analyst Steven Englander noted the brief bout of dollar strength on the initial news on Sunday night and how quickly it reversed.
It is unclear, however, whether Bin Laden’s death would alter US foreign policy in the region or accelerate the withdrawal of US forces from Afghanistan, so “the impact of the news on the trajectory of fiscal imbalances and macroeconomic policy will likely be modest”.
While there may be some short-term dollar-positive effect either from safe haven flows off the perceived risk of retaliatory attack or conversely some expectation of lower oil prices, Englander’s view is that the news “is probably more USD positive than negative, but fundamentally little of either”.
He concludes:
Based on the similarity of the immediate reactions of the USD and US equity futures, the USD move does not appear to be driven by positioning. However, negative sentiment for the USD has accelerated in recent weeks and short USD positioning remains high. This event serves as a reminder that the USD is increasingly susceptible to short squeezes, but the relatively quick reversal also indicates that some pretty committed USD sellers remain in place.
In the long term, says Breakingviews, “Bin Laden’s lack of a pulse has given one to Obama, but he’ll need a more electric recovery to assure his presidency lasts a second term”.
In the shorter term, we have to agree with Exchange blog, which described the news as mostly a geopolitical moment — with some “market implications”.
Related links:
Trading Osama – Climateer
Bin Laden’s death: what market watchers say – MarketBeat
Security experts warn against complacency – FT
American cheers Bin Laden news – FT