On the commencement of the first Gulf war in 1991, the markets on average rallied 3% in the next trading session and then proceeded to rally a further 12% as the war progressed.
The first issue we must address is the cost of war, in terms of hard cash.
David Butler is chairman of Global Trader 247.
Are we going to see this happen in this second Gulf war? Since the French announced that they were going to veto any second resolution on Iraq, effectively guaranteeing that a conflict would occur sooner rather than later, the markets have had some of their biggest gains ever; the FTSE alone rallied 20%. Since the weekend, however, the reality of war has tempered the markets somewhat, with the realisation that this is not going to be a quick and easy war and that people are going to die. This has cooled investors` short-term optimism, causing the markets to pause for breath.
The trading pattern of the last two weeks has been highly predictable, very much following the pattern of the markets during the first Gulf War. However, this conflict is different, and the conditions of the major global economies combined with continued geo-political risks may result in a far more protracted economic stagnancy than many forecasters are predicting.
While the performance of the markets has been quite remarkable over the last few weeks, we must look beyond this, as this is a purely short-term relief rally as a result of the elimination of significant uncertainty: the war has started. However, if we have a "positive" result for the war - that is a regime change in a campaign of no longer than three months with minimal casualties - what then does this mean for the global markets? A number of scenarios are possible.
The first issue we must address is the cost of war, in terms of hard cash. The US economy is already running a very significant budget deficit and the cost of war is simply going to add to this. This is going to result in the US government having to issue debt, which will have the effect of driving up interest rates. This will hurt the US consumer (the one driving force of the US economy) and will temper their spending and so this may have significant impact on economic growth.
Secondly, we must examine perhaps what is the second most important influence surrounding the war: oil. A successful outcome, as described above, would result in the West having direct access to enormous quantities of oil and would in effect give the West control of the oil market, allowing it the ability to dictate the price of oil. Given that oil was as low as $10 per barrel as recently as three years ago, a significant increase in the supply of oil could see prices back down to those levels. Combining this very significant stimulus with an interest rate environment as low as we are currently seeing, could lead to significant inflationary problems - which would damage the global economy and the global markets.
Thirdly, and importantly, is the geo-political risk. While this current conflict should address the issue of Saddam Hussein, there are many other areas of concern. North Korea is perhaps the first and foremost risk; it appears simply that the country is going to go ahead and build its nuclear reactor. This has led, and will continue to lead, to significant political tensions. We must also be concerned with the danger of reprisal attacks against the West from terrorist organisations. One cannot think that the risk of this will decrease as a result of the actions taken in the Middle East.
So is it all doom and gloom out there? Is there any light at the end of the tunnel?
Perhaps there is. Over the last two years there has been significant pessimism among the consumer and more so the investor. A `successful` war might just change this mood and might just give rise to some significant optimism. This could have a dramatic impact on the investment cycle, and combining this with a massive increase in spending by the US government as a result of the war, might just do the trick and knock the markets out of their four-year bear phase. History shows that wars are often successful remedies for economic malaise. And as we know, even with this war, `history repeats itself`, however depressing that may be.
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