Monday, March 17, 2003
The markets are supposed to be neutral risk-measuring machines. But it's kind of funny how, after the weekend's news that the "window of diplomacy has closed" that European markets sold off in the morning, then rallied sharply as soon as the U.S. markets opened, on a strong rally. And no, it isn't a case of "war helps America and hurts Europe" because Globex S&P futures traded off during European hours along with the European markets. European traders just looked at things differently than American traders.
Most of the commentary is saying that the markets are now discounting a short war and minimal damage to oil supplies. I think that's part of it (though what has changed about this assessment since last Monday? beat's me). I think a bigger factor is simply the elimination of uncertainty: now we know, war is coming, imminently, and we can stop discounting uncertainty and start discounting likely costs and benefits. But one factor that I don't think has been discussed so much is that the markets were discounting the sheer monetary cost of diplomacy. The price tag for bringing reluctant allies along was getting huge, and we had still made no headway with Mexico or Turkey, to say nothing of France of Russia. If Bush remained committed to winning more support, what would it cost in terms of sheer spending? And if a huge military commitment was going to be maintained indefinitely while diplomacy continued, what would the ultimate price tag for the military side come to? I think the market was starting to get nervous about these ever-escalating numbers, with no sign of where they would top out.
Now we'll see what happens tomorrow, when the market starts thinking about the costs of reconstruction.