There were widespread fears a month ago that the terrorist attacks in the United States would throw the world’s financial markets into turmoil.
Although there has been no sign of serious disorder caused by the attacks, it’s still too early to conclude that better days lie ahead for equity markets.
Worries remain over global economic prospects in general and the outlook for the U.S. economy in particular.
With business sentiment faltering, capital spending remains sluggish in the United States. Consumer spending is holding its own, despite the anxiety about the effect of the terrorist attacks.
But this anxiety could prove too strong.
A slump in consumer spending would cast a long shadow over already bleak U.S. economic prospects and, therefore, the outlook for economies across the world.
Another factor clouding world economic prospects is uncertainty about the scope and duration of U.S. military action against terrorist targets in Afghanistan.
If the war ends quickly, the U.S. economy will no doubt rebound, riding high on growing demand for war materials and other goods.
But if the military action drags on, a prolonged economic slowdown will be inevitable.
In Japan, there are widespread fears that the beleaguered economy will slide into a deflationary spiral.
Needless to say, the nation is faced with the overriding need to push for economic restructuring. But stepped-up efforts to write off banks’ bad loans would adversely impact the already weak domestic economy.
The underlying economic reality is weighing on share prices. Many analysts cite as major factors behind the recent rebound in Japanese share prices a pickup in the flow of money into stock markets around the world and investors’ moves to cover their short positions by buying back stocks.
Short sellers should have benefited from the recent tumble in share prices and have unwound their positions to cash in on profits.
The rally prompted by such factors cannot be sustained for long.
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