Economy in the balance

Wall Street prepares to resume trade on Monday

The direction of the global economy hangs in the balance as all eyes turn to the reopening of the US stock markets for evidence of a "patriotic" rally or a US-led slide into recession.

The US Federal Reserve cut interest rates by a half point to 3.0% just before the US stock markets reopened for the first time since the attacks last Tuesday. The European Central Bank followed hours later with a half point cut to 3.75%.

US President George W Bush late on Sunday acknowledged the country's economy had suffered because of the terror attacks on New York and Washington, but said he had "great faith" in its resilience.

How bad is it going to be? Will there be a big sell off?

Arthur Hogan
Jefferies

There are many predictions, but after last week's unprecedented attack on the US and the global financial system, the reality is that no one knows.

The Bank of Japan indicated it will consider further easing monetary policy and on Monday intervened in the foreign exchange markets.

Consumer confidence

Consumer confidence is the key to the US economy, which is dangling just beyond recession after reporting 0.2% growth in the last quarter.

Work hard, as you always have

President Bush

If US stock markets hold steady or rise, it would reassure households to keep on spending.

But a plunge in stock prices could lead to a contraction of the US economy in the second quarter.

"How bad is it going to be? Will there be a big sell off?" are the questions on Wall Street, said Arthur Hogan, chief market analyst at Jefferies.

Mr Hogan said he doubts there will be a selling frenzy, calling it inappropriate in light of the tragedy.

Market guru

One of America's most prominent financial figures, investment guru Warren Buffett, has pledged he will not be selling any stocks on Monday, though he might buy.

"My view is that this is the best place in the world to invest," Mr Buffett said

"We have the strongest economy."

US Vice President Dick Cheney said on Sunday America's economy was "strong", but that the country could "quite possibly" be in recession, though he expected it to rebound later this year.

President Bush's planned military action will also be decisive influence on consumer confidence and short term spending.

Trade resumption

In the lead-up to Wall Street's reopening, the US authorities have invoked emergency powers to support the markets by relaxing trading rules and pumping billions into the financial system.

Technicians are working around the clock

There have been calls for a "patriotic" rally on Monday, but European investors appear to have been unconvinced, sending shares lower last week.

London shares slid more than 6% to Friday to close at the lowest level in nearly three years.

Frankfurt's main index lost 13%, Paris's 11% and the Tokyo Nikkei 225 lost 4.8% by Friday's close.

Analysts think traders might hold back from making any major moves out of respect for the thousands believed to have been killed.

But many investors, worried about the future of the market, the economy and the country, will want to adjust their investment portfolios.

The Dow was essentially unchanged last Monday when it slipped 0.34% to 9,605.5 but the Nasdaq composite index gained 0.5% to 1,695.4.

The markets have been closed since the attacks as the exchanges, big investment firms and the Securities and Exchange Commission (SEC) scramble to put the infrastructure in place to allow trading to resume in an orderly manner.

Analysts also point out that the markets have other safeguards to keep them from falling too sharply, with circuit breakers that halt trading on the Dow Jones industrials after falls of 850, 1,750 and 2,600 points.

Consumer confidence

During the Gulf War, however, consumer confidence took a short-term hit and there is expected to be a similar reaction once military action is taken.

Consumers spend less in times of war

In 1990, uncertainty over the Gulf War saw department store sales plummet and energy prices shoot up.

When the bombing of Iraq began, sales fell further as people sat glued to their television sets.

But once large-scale hostilities ceased, consumer spending resumed.

Industry is already hurting, the most prominent being the airline sector, which suffered an unprecedented two-day shutdown of US airspace.

Frightened passengers have deserted air travel and tight new security regulations have forced US carriers to cut long-term schedules by 10 to 20%.

White House officials have agreed to meet early next week with the aviation industry - already suffering because of the global economic slowdown - to discuss financial aid.

The House of Representatives is considering a proposed $15bn bail-out of the aviation industry.

Downturn expected

Hard times loom for luxury goods companies as the attacks have shaken US consumer confidence and it could take half a year to return, said Johann Ruper, chief executive of luxury watch maker Richemont.

"The only thing I know is that hard times are ahead," he told the Finanz und Wirschaft business paper.

"Consumer confidence is shaken. It could take six months before it is restored.

"Psychological components could influence development even longer now that the US has been attacked on its own soil for the first time in its history excluding Pearl Harbor."

Other industries are also hurting because of the shutdown.

Ford Motors has temporarily shut several North American assembly plants because of parts shortages blamed on travel restrictions imposed following the terrorist attacks.

Government aid

The US Senate on Friday approved a $40bn aid package, raising the prospect of an extra boost to the economy.

And about $40bn in tax rebates have also started landing in people's mail boxes, which may boost spending.

Finance ministers and central bank governors of the Group of Seven (G7) leading industrialised nations pledged last week to avert disruption to the global economy.

Co-ordination by the world's central banks lead by the Fed injected $118bn into the financial system from Wednesday to Friday to supply banks with sufficient dollars.

It was joined by British, Canadian and European central banks, which added a further $90bn to ensure foreign commercial banks had sufficient US dollars during the crisis.