This does not look good. A series of terrorist massacres in Paris, a security clampdown across Europe, more intensive scrutiny of the movement of people and goods across borders and a deeply sobering start to the season of shopping an leisure visits: markets around the world are set for a shaky start this morning after the savage and indiscriminate slaughter in the centre of one of the world’s most famous capitals.
It will take weeks before the longer term ramifications of the terrorist attacks become clear. Security will now preoccupy the attention of eurozone leaders for the foreseeable future. It is hard to conceive of an event more likely to jolt political, business and consumer confidence and at a critical time.
The past week brought growing conviction that the Russian civilian airliner that crashed to earth over the Sinai desert was the result of a terrorist bomb placed in the aircraft. Egypt’s most popular holiday resort for European and Russian visitors is now denuded of custom. Bookings to other North African resorts will be hit.
Set against that, a fall-off in Eurostar shopping trips to France might hardly seem to signify as an economic loss. But it is unlikely that consumers will quickly forget the horrific images that have dominated newspapers and television screens for the past few days, or that cross-border movements of people will simply continue where they left off.
All this adds to an already jittery mood about immediate prospects for European economies – especially as it has been consumer spending on which eurozone economies have had to rely for growth. France’s economy is already in the danger zone. French GDP inched ahead by just 0.3 per cent in the last quarter, following zero growth in the April-June quarter, fuelling fears that the economy was stalling.
And last week brought renewed concerns about the length and depth of the Chinese slowdown. The oil price is back down below $45 a barrel – the market rocked by the latest report from the International Energy Agency indicating record stockpiles of almost three billion barrels. Over the week, the FTSE 100 index fell 3.7 per cent to 6,118.28. And all major European stock markets suffered falls over the period – all this before terror erupted on the streets of Paris. Russia, which is heavily dependent on oil, took a big hit, with its stock market 5.9 per cent down over the week
Until last week the biggest concern for investors had been the prospect of a US interest rate rise next month. This looks increasingly likely in the wake of exceptionally strong US jobs figures. This has convinced markets that a rate rise is imminent and also worked to send the dollar higher against the pound, and even more so versus the euro and the yen. What troubles investors is not so much the prospect of a rise in money costs but that this is occurring against evident signs of slowing growth across the world’s economies. An assessment by the OECD last week warned that the anaemic performance of world trade posed risks to growth in the year ahead.
Normally, such a movement by the US Federal Reserve would see other leading central banks following suit. But it is more likely the European Central Bank, concerned about the blow just delivered to eurozone household and business confidence and already apprehensive about France slipping back into recession, will not only maintain interest rates at their ultra-low level but will also pump more billions of euros into the banking system as soon as next month.
Only UK corporate bonds saw gains in the past week. Talk of rising interest rates is normally bad news for bonds – and the same is true for property where yields are diminished. But the UK property sector suffered notable falls last week, despite investors believing the UK won’t raise rates until next year, while negative interest rates are expected to persist in Europe for some time.
All in all, this makes for a particularly worrying time for investors. It may be tempting to take a cautiously relaxed view, that public and government apprehension will subside in the coming months with little permanent damage done to the global outlook. But horrific in scale though they were, the brutal attacks in Paris did not come out of the blue; they follow the Charlie Hebdo slaughter just ten months ago and a string of smaller but unnerving incidents that have tested France’s security arrangements.
They also raise further concerns over the ability to contain and overcome ISIL’s continuing threat, not only in Syria but the whole of the Middle East. There is an uneasy sense that history has moved another notch towards a new and altogether more troubling and disruptive era.
In these circumstances investors are likely to take more money out of markets and retreat to the sidelines despite near zero rewards on fixed interest savings. Given the outlook, it is hardly surprising that capital preservation now becomes even more of a priority.