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Markets continue down

Fundamentals of the economy and consumers are getting ignored with the 24/7 war coverage, writes Dr Dasgupta.

india Updated: Jun 04, 2003 15:19 IST

Markets drift down
The fundamentals about the economy and consumers are getting ignored completely with the 24/7 coverage of the war. The numbers coming out of USA are not good - the non-farm payroll figures dropped significantly over consensus and the consumption figures are steadily drifting downwards.

The equity markets were showing a slight upward trend throughout the week, but trading on a relatively narrow range during the day. This is expected to continue till the war ends. Some rumours in the market refer to a sharp correction at the end of the war.

Japan is merrily and steadily sinking into the mire. The Japanese financial year ended and the banks are suffering because of the increasing bad loans. Not only that, the insurers are trapped in a totally untenable position of having to pay out fixed high payouts, when the returns on the fixed income and stock markets are measly.

The banks are trying to shore up tier one capital reserves by right's issues and government fudges, but to no avail. The markets are going down. To make matters worse, the insurers hold a large chunk of the bank shares. The Japanese financial system is slowly drifting down like an airship in high winds with no rudder or engines and steadily escaping gas while the crew are
playing mah-jong.

The bond markets behaved like the equity markets, ignoring the US Labour market figures and showed a steady drift down, with a bounce coming when the Iraqi's promised unconventional attacks on the US forces holding Baghdad airport.

UK markets were anticipating an increase in gilts issuance to pay for public sector commitments and for the war in Iraq, the UK interest rates are not expected to change from the current 3.75%. Europe was quiet while JGB's prices kept on going up reflecting the general Japanese malaise.

The currency markets were relatively calm, with trading in a very tight range, with most of the US movements coming from the war news, although the US payroll figures did cause the euro to rise a bit.

Both gold and oil are slowly going down. The Nigerian situation has eased and the oil taps are open again. The supply side seems to be getting back to normal and the feeling seems to be that oil will drift lower after the war ends and the onset of summer when the demand slackens.

Low diving airlines
What is driving lower is the airline industry. KLM announced job cuts, the Far Eastern (Singapore Airlines, Cathay Pacific, Chinese airlines) and Japanese airlines (JAS and ANA) are suffering, due to the impact of SARS on air travel. Air Canada filed for bankruptcy, but American Airlines escaped it, while US Airways emerged from chapter 11.

But the worldwide airline industry is heading for some significant rationalisation over the next few weeks. The TMT sector is suffering, as well, with lots of movement; AOL Time Warner has another accounting problem with its revenues; there is a buyout contest in Italy for the phone directory arm of Seat Pagine Gialle, while SBC communications gave up on its attempts to get its hands on DirecTV.

The World Bank released a new report, Global Development Finance 2003 and in particular, it notes that the FDI and remittances are more important sources of finance than private lending for developing countries.

Exim policy boost to FDI
The current Indian Government's assertiveness in helping Indian foreign workers in Malaysia, Netherlands and Kuwait is considered to be good and evidence of this sector's rising importance. As for the FDI aspect, the new Indian EXIM policy announced this week, was a major boost to FDI and general economic infrastructure, concentrating on simplifying procedures, focusing on growth areas such as textiles, automobiles, gems and jewellery. The policy also removed export restrictions on items such as paddy, rare earths and textiles.

The other strand to this policy was to give a push to the services sector like health care, entertainment, professional services and tourism. Agricultural exports were also given a hand with the establishment and encouragement of agricultural export zones. This step is well timed with the WTO discussions on agricultural tariffs and subsidies ongoing in the Doha round. While the negotiators missed the deadline, it is not such a bad step.

One would expect to see some progress made in the following months. In September, when the Trade Ministers meet, the situation will be clearer.

The Iraq War isn't helping anyone right now. The WTO is slowly covering more and more of the globe, with 146 members currently in place. There are some major gaps, such as Russia, Cambodia, Kazakhstan, Lebanon, Saudi Arabia and Ukraine still outside the WTO framework although accession talks are continuing.

War's economic consequences
Now lets take a peek from the trenches to the ivory towers. A recent working paper from Andrew Leigh (Harvard), Justin Wolfers (Stanford) and Eric Zitzewitz (Stanford), analyses financial market data to understand the economic consequences of the War in Iraq.

They use a new future on an online betting exchange called as "Saddam Security" that pays off only if Saddam Hussein is ousted and find that this security provides a plausible estimate of the probability of war. They also determine that the war seems to raise the price of oil by about $10 per barrel, with prices reverting back to pre-war levels in about 18 months.

There is a 15% reduction in the value of US equities because of war and confirmation that oil importing countries or highly globalised economies will be exposed to the greatest adverse reactions.

While India is still relatively insulated from the world economy, the question which one asks is whether our oil purchases are sufficiently well-timed or oriented to cover the spikes in the oil price.

Furthermore, for jingoistic people in our part of the world, it is well worth considering whether the state has the economic wherewithal to fund the war, as well as to suffer the economic consequences, some of which are listed above.

(Dr Bhaskar Dasgupta works in the City of London in various capacities in the banking sector. He also lectures at several British Universities. He holds a Doctorate in finance and artificial intelligence from Manchester Business School and is currently working on another doctorate at Kings College in international relations and terrorism. He will be writing a weekly Monday round-up on markets and indicators.)

First Published: Jun 04, 2003 15:19 IST