NewsBy Gary Duncan, Economics Correspondent
>From Timesonline 18 March 2003
MARKETS bet yesterday on a swift and decisive end to what seemed an inevitable war in Iraq, sending shares and the dollar surging upwards. As Britain and the US called a halt to UN diplomacy and President Bush prepared to deliver a new ultimatum to Saddam Hussein, the end of weeks of uncertainty saw investors pinning hopes on a quick war. Market speculation that the fragile world economy could emerge largely unscathed from a short-lived conflict triggered a repeat of the powerful rally in shares seen at the outbreak of hostilities in the first Gulf War.
"This is the rally, this is the war rally, we've come through the valley of death," said David Franklin of Christows, the brokers. A leap in Wall Street share prices as markets sensed an imminent resolution of the Iraqi crisis erased early opening losses in New York and ignited big gains in London and on European bourses.
Leading UK shares reversed steep falls in a late charge upwards that drove the FTSE 100 index up 120.5 points, or 3.4 per cent, to 3,722.3 - its highest close in three weeks. At one point, the FTSE hit 3,774.3, its best intra-day level since late January. In New York, the Dow Jones industrial average rose 282.21 points, more than 3 per cent, to close at 8,141.92. The tech-laden Nasdaq and broad-based S&P 500 also saw strong gains.
As the dollar also leapt to a two-month high against the euro, some analysts and investment managers spoke as if a war in which no shots had yet been fired was already over. Mr Franklin predicted: "The market will go to much higher levels . . . the hill on the other side is much higher than the one we are standing on."
Mark Chandler, a currency strategist at HSBC in New York, said: "People are trading on the idea that this war is coming, that it will be short-lived, and an easy victory." But some analysts urged caution. "If this is the victory rally, it is going to be short-lived unless we get that perfect war that follows on - which is a week or two and then a victory parade and then back out again," said Anais Faraj, global strategist at Nomura.
As the dollar's resurgence pushed to euro to lows of $1.0589 before it clawed back ground to $1.0630, the pound was caught in the crossfire. Sterling was also hit by market jitters over political uncertainties after Robin Cook, Leader of the House of Commons, quit the Cabinet over Tony Blair's stance on Iraq.
The pound fell 1 per cent against the euro before recovering all its losses. But it ended down 0.95 cents against the dollar, at $1.5770, having earlier dropped as low as $1.5667. The gyrations left it little changed on its trade-weighted index, at 101.0, down 0.1.
Despite fears that a loss of Iraqi production will disrupt global oil supplies, oil prices fell sharply as war loomed closer. Benchmark Brent crude dropped 73 cents to $29.35 a barrel on London's International Petroleum Exchange, which was forced to close for two hours after a raid by anti-war protesters.
Safe-haven assets in gold, gilt-edged stock and US Treasury bonds all fell back as shares and the dollar advanced. As bond prices climbed, the yield on ten-year benchmark gilts hit its highest since mid-January, at 4.4 per cent.
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