NEWS ANALYSIS : Initial Reaction Shows Global Village Can Take War in Stride

Judging by the first three hours of air attacks on Iraq and Kuwait by U.S. and allied forces, the Persian Gulf war could well be the short, sharp affair that business people and the financial markets have hoped for.

Reactions, accordingly, were bullish. Securities traders in Tokyo, in other Asian markets and in Australia watched their televisions and sent stock prices up.

In oil, the reaction was nervous at first, then routine. In trading in Singapore, the price of a barrel of oil rose by $4 or so, an increase that would add about 10 cents on a gallon of gasoline. That was far less volatility than had hit oil prices on many hectic trading days since Iraq’s Saddam Hussein invaded Kuwait Aug. 2 and set off the chain of events that led to Wednesday’s military action.

What this means for stock, bond and commodity markets in the United States today is that they may very well open with a surge of buying. But that might be followed by an equal amount of profit taking.

That is, the initial news may be so good that traders can act more or less normally, as if they’re only looking at routine business statistics rather than news of hundreds of air sorties over Baghdad.

In Tokyo trading, even as the war was beginning, traders took profits in the U.S. dollar--a good sign, meaning frightened investors didn’t need to buy the dollar as a safe haven. The world would be safe.

Make no mistake, the markets were not being superficial in their bullishness in the early hours of fighting. The good news was telling them that the objectives of the United States and its allies will be achieved.

And those objectives are important. As President Bush put it in his televised address Wednesday evening, the aftermath of a successful operation in the Persian Gulf would be “a world where the rule of law applied, and not the law of the jungle.”

In purely financial terms, the rule of law means an increase in business confidence, and business insurance premiums that are perhaps 5% to 10% lower. No wonder stock prices rose.

A word of caution. Events could turn bad for the allied effort; perceptions could change quickly if Saddam Hussein can somehow prolong the war and cause problems for the coalition.

Markets rose after Israel’s victories in the 1973 desert war but did not take into account the Arab oil embargo and worldwide recession that was to follow in 1974.

This time, the aftermath should be good for the world economy. But it is still too early to judge that definitively.

Finally, the medium was the message on Wednesday. Events took place under the constant watch of global television. And for business that meant some traditional rules and customs of financial markets need to be updated.

One is the tradition that markets should be closed at such times to allow news to sink in. The markets were open in the initial hours of war Wednesday and reacted without panic buying or selling.

In the global village, even war is taken in stride, with traders taking profits as they watch the news on television. That, too, is part of a world “where the rule of law applies.” No wonder the reaction was bullish.