Markets shrug off terror fears

The foiled threat to bomb transatlantic flights may have caused travel chaos, but markets remained calm. Is this complacency?

The foiled plot to detonate bombs on up to ten aircraft flying between the UK and US rivalled the attack on the World Trade Centre in its intended carnage. Yet the markets' relatively muted reaction was appropriate, says Richard Wachman in The Observer. "Although we cannot be complacent about the potential consequences of a massive terrorism outrage the business world is very different from what it was on the eve of 9/11."

When the airliners smashed into the twin towers, the dotcom bubble was already bursting and US companies were moving into recession. Firms have since become lean, mean machines, and profitability has recovered strongly. In addition, terrorist outrages are already factored into market prices. As John Authers points out in the FT, research shows that following the other major terrorist events this decade, the S&P 500 gained 2%, on average, within a month.

This makes sense. The extreme resilience of market economies means it takes a lot to plunge a wealthy, sophisticated Western country into recession, or even significantly dent economic growth, says Allister Heath in The Business.

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Last summer's London bombings only briefly affected both the economy and the markets; this time around the disruption will be tiny. And that's certainly the view that investors took, says Nils Pratley in The Guardian. Gold, the traditional safe haven in times of crisis, initially rose when news of the plot broke, but actually ended down on the day, while the FTSE 100 lost just 37 points.

Still, while this calmness is "admirable in a way you have to wonder whether calmness is really complacency", says Pratley. It's as if politics and non-financial events no longer matter to investors. While war rages in the Middle East, the City and Wall Street are more obsessed with interest rates.

But "this is still probably the correct assessment", says Simon Nixon on Terrorism and the events in Lebanon and Iraq have had little impact on the global economy. The immediate threat is more mundane. The US Federal Reserve must steer a "precarious course" between preventing inflation and crushing growth, and that's what investors should be watching. "A successful terrorist attack could upset that calculation. But until then investors should focus their anxiety on whether the Fed is up to the task."