Stock market impact expected to be short-lived

John W. Schoen Senior producer • Profile • E-mail

Stock market traders were quick to respond to the terrorists blasts that rocked London early Thursday, selling off transportation related stocks and buying up companies involved in terrorism security. But the reaction was more muted from investors taking a longer view, and investment advisors on Wall Street noted that, if history is any guide, the economic and financial impact of attacks will be short-lived.

“What tends to happen is that you get a short and sharp drop, and then a recovery,” said Ed Keon, a market strategist at Prudential Equity Group in a note to investors. “This has happened repeatedly over time, for example after the Madrid bombings a couple of years ago.”

The initial stock market sell-off was sparked by fears the attacks could touch off a global economic slowdown. Oil prices fell sharply from record highs on bets that such a slowdown would curb demand for crude. But oil prices recovered some of those losses later in the day.

Investors also feared the attacks on one of the world’s major financial centers could create a major snag in global stock, bond and currency trading. But the impact on operations at banks and brokerages in London’s "Square Mile," the heavily secured financial district, was expected to be short-lived.  

Thousands of workers struggled with the city’s damaged transport system, but key financial markets continued to function normally. The London Clearing House, LCH Clearnet, which settles stock market, commodity and energy trades, was evacuated, but operations shifted to its disaster recovery site. Trading proceeded normally on the London Stock Exchange. Major banks and brokerages, including UBS AG, Goldman Sachs, J.P. Morgan Chase & Co, Deutsche Bank AG and Merrill Lynch said business had carried on as usual. Some called on colleagues in New York to come in early to help out with trading.

Shares of major airlines and hotels fell on worries that the attack would discourage travelers from future bookings. But the Dow Jones transportation index recovered from its early lows and some analysts suggested those initial fears may have been overdone. “We don’t expect that there will be a major impact on international travel,” said airline analyst Jim Corridore at Standard & Poor’s in New York.

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Stocks of some major insurance companies fell on concerns that they may be hit with claims to cover the costs of damage from the blasts, pushing the S&P index of insurance companies lower.

German insurance giant Allianz AG said it was facing exposure of $10 million or less because of its participation in a terrorist-risk coverage plan led by the British government. The insurance plan was adopted in 1993 following several attacks by the Irish Republican Army. It covers most of the cost of damage to property and business interruption by any terrorist attacks.

German reinsurance companies Hannover Re and Munich Re -- the world's largest reinsurer -- both said they were not involved in the British terror insurance plan and were unable to say what impact the blasts would have on their business.

Buying was heavy in smaller, security-related stocks, including companies like Viisage Technology Inc., a maker of face-recognition technology, and Identix Inc., which produces fingerprint and face-scanning systems and Isonics Corp., a maker of portable devices that detects explosives.

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