When terror lights up the trading board

The precise psychological context of 9/11's market rout will never be repeated, but long-term risks remain.

Everyone has a story about where they were when the news of the 9/11 terrorist attacks broke in 2001.

Most Australians heard the news over breakfast on Wednesday 12 September, and so about eight hours had elapsed between the planes hitting the World Trade Centre towers and the attacks becoming general knowledge here.

That meant firstly that some sense was emerging as to what exactly had happened, and secondly that the Australian trading day could proceed in a way that was impossible in New York.

The New York Stock Exchange stayed closed for four days, whereas in Australia trade on the Australian Securities Exchange got some of the stock-market pain out of the way.

As The Australian newspaper recorded on the Thursday with a well-crafted headline, Wednesday 12th was a ‘Day of fear and unloading’. The local bourse dived 4.1 per cent, with insurance firms and companies with large exposures to the US hammered hardest.

Ironically enough, the bourse was on its way down anyway. On September 10, Cameron Stewart wrote in the same paper: “Investors face a crunch week on global markets amid warnings that Wall Street's fortunes in the coming days will be a key pointer to chances of a US economic recovery.”

In the same article, JB Were’s Terry Campbell told the paper: “There's a very real chance that what we're seeing is the final washout, the final sell-off that you need to create a market bottom ... People are very pessimistic but that's always the characteristic of markets that are bottoming out.”

Well, they got a lot more pessimistic after that. Global bourses sold off heavily over the next few trading days, with the final result being 10 per cent wiped off the ASX, and 12 per cent in New York and London.

The London Stock Exchange was mid-trading day when the first images of the attacks filtered through. My editorial assistant emailed me a screenshot of CNN’s web site, which was too jammed with traffic to function.

At that time I was working in a large London newsroom, where colleagues and I stood transfixed by images flashing up on the TV -- but not too transfixed to periodically duck back to our desks to watch the FTSE 100 index in freefall. It closed down 5.7 per cent.

Revisiting memories of that time, it’s natural to wonder whether terror attacks that are widely predicted in response to the allied intervention against ISIL in Iraq might similarly ravage markets.

At present it looks unlikely.

As AMP’s Shane Oliver wrote last week in a note to clients, the experience of several subsequent terror attacks shows that the scale, and shock value of 9/11 was something of a one-off.

He wrote: “Terrorist attacks are horrible in terms of their human consequences and there is no doubt that an IS terrorist attack in a western country would be taken badly by sharemarkets.

“But the experience with various Al-Qaida related attacks (9/11, Bali Bombing, 2005 London bombings, etc) is worth recalling: after an initial negative impact sharemarkets bounced back as it was clear that there would not be a major economic impact and it seemed the effect on markets weakened as the terror threat continued.

“It only took just over a month for the US sharemarket to recover from its 12 per cent post 9/11 slump and it took the UK share market one day to bounce back from its 1.3 per cent fall on the day of the July 2005 London bombings.

In Australia, neither the 2002 nor 2005 terror attacks in Bali had an impact on financial markets -- both occurred on weekends, which gave traders time to think through their implications before markets opened.

There is, however, reason to fear longer-term economic consequences of an increase in the frequency and scale of terror attacks inspired by ISIL campaign in Iraq.

The ISIL fighters, if left to expand their power base, could pose a longer-term threat to oil supplies. Tactical assaults on oil infrastructure might well cause more panic in markets than the kinds of attacks on civilians mentioned above.

The geopolitics of oil in the Middle East is changing, quite radically, but that is not to say it’s becoming less important in the global economy.

Rather, consumption of Middle East hydrocarbon -- oil and natural gas -- is increasingly shifting to Asian economies, particularly to the energy-hungry middle classes emerging in China and India.

Where the oil fields of Iraq and Saudi Arabia were once central to US economic strength, the Americans have spent the past decade unlocking new energy sources -- shale oil and gas, substantial new oil fields in North Dakota and Montana, offshore resources and so on -- and will be an increasingly important exporter of energy in the decades ahead, including to the east Asian economies.

So while the US is more insulated from Middle East oil shocks than it has been for decades, the opposite is true for Asia’s rapidly industrialising nations. It is those economies that will be watching most closely for signs of ISIL destabilisation affecting oil prices.

As Adam Carr has written this week (Why investors are losing faith in Australia, September 30), Australia is going through something of an international re-rating at present -- both the dollar and ASX are losing ground. 

Any terror shocks that come could accentuate that downward momentum temporarily, but it is the longer-term threat of an energy-hungry Asia being frustrated by Middle East instability that would have most bearing on Australian markets. 

And, of course, we mustn't give up hope that neither will come to pass.