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Mix-Ansicht- Bush Readies Attack While Investors Ready Portfolios - peter72, 14.09.2002, 21:53
Bush Readies Attack While Investors Ready Portfolios
-->By Emma Moody
New York, Sept. 12 (Bloomberg) -- President George W. Bush spent the morning trying to persuade the world to support him in an attack on Iraq.
Investors are way ahead of him. Anticipating a strike, and a war that by one estimate might cost the U.S. as much as $80 billion, investors have been buying two-year U.S. Treasury notes, stocking up on gold, purchasing Swiss francs and piling into oil.
An actual assault is likely to propel those prices higher, as money managers seek havens, some investors said. The U.S. dollar, down 10 percent against the euro this year, may drop a further 7 percent, they said.
``Bush will get his desired outcome one way or another,`` said Vic Thompson, who oversees assets of $280 billion as director of global fixed-income at State Street Global Advisors in Boston. State Street managers bought interest-rate futures to shield their portfolios in case rates drop, Thompson said.
In an address to the United Nations` General Assembly, Bush urged world leaders to force Iraqi leader Saddam Hussein to get rid of his weapons of mass destruction and said the U.S. wants to work with the UN though can act alone if necessary.
``If Iraq`s regime defies us again, the world must move decisively to hold Iraq to account,`` he said.
Footing The Bill
Investors are betting the U.S. will move -- with or without the support of the rest of the world -- within the next few months. Either way, the U.S. may fund the bulk of the expense, which likely will spiral beyond $50 billion and as high as $80 billion, said Ivan Eland, director of defense policy studies at the Cato Institution, a Libertarian think tank in Washington.
The increased spending would spell bigger budget deficits and put a damper on purchases by consumers and businesses that would weigh on the economy, some investors said.
The 1991 Gulf War cost $80 billion in current dollars, $60 billion at the time. Saudi Arabia, Japan and other U.S. allies reimbursed the country for about 80 percent of the costs, Eland said.
``We`re going to be pretty much on our own in this battle,`` said Paresh Upadhyaya, a currency analyst in Boston at Putnam Investments, which manages $67 billion of international assets. Putnam holds a smaller proportion of dollars than indexes it follows. The Swiss franc and euro would rise after a U.S. military strike against Iraq, Upadhyaya said.
The war`s price tag would help keep the budget in deficit, said Ethan Harris, co-chief U.S. economist at Lehman Brothers Holdings Inc. Lehman projects a deficit of $165 billion in 2002 and $170 billion in 2003, before any war costs.
Dollar
The dollar reached a six-week low of 99.88 cents per euro last week as concern mounted about military action. While the currency gained ground this week as worries of a repeat terrorist attack eased, increased tension may send the dollar to at least $1.04 per euro, some investors said.
The U.S. currency, recently trading at about 120.50 yen, may fall as low as 115 yen, some investors said. They said the Swiss franc may be the biggest beneficiary of a search for safety, rising to 1.38 francs per dollar from about 1.50 francs.
``Everything hinges on the Iraq situation,`` said Kazuyuki Takigawa, who helps oversee about 100 billion yen ($832 million) in foreign-currency denominated debt at Fuji Investment Management Co. in Tokyo.
Twelve years ago, the dollar fell 15 percent against the yen in the 10 weeks after Iraq invaded Kuwait on Aug. 2, 1990. It rallied before declining a further 7 percent in January after U.S. air attacks started.
Gold and Oil
Gold rose $1.10 to $319.20 an ounce at 11:40 a.m. in New York after Bush spoke. The active futures contract surged to a six-week high last week of $322.80 an ounce as expectations of military action heightened and may reach $360 -- the highest since February 1997, some analysts said. A prolonged engagement might send gold to more than $400 an ounce, they said.
In 1990, gold surged 11 percent to a peak of $415.5 an ounce after Iraqi troops invaded Kuwait.
Crude oil, now near 11 month highs at just under $30 a barrel, would probably rise further on concern about supplies from the region, which exports about a third of the world`s oil. Crude oil for October delivery fell 97 cents to $28.80 a barrel at 11:40 a.m. on expectations an assault may be delayed as Bush works with the rest of the world to disarm Iraq.
``The first reaction to an attack will be to the upside because the uncertainty about supply will be foremost in people`s minds,`` said Tim Evans, senior energy analyst at IFR Pegasus. Oil might rise to about $35 a barrel, he said.
Oil almost doubled to $41.15 a barrel between August and mid- October 1990.
Judging by the experience during the Gulf War, price increases may be short-lived, some investors said. Oil and gold retraced all their gains by February 1991, just weeks after the U.S. began its military campaign.
Treasuries
The U.S. two-year Treasury note, which has returned 5.1 percent this year including reinvested interest, would likely extend its gains following an attack. The gap between the yields on the two-year and 10-year notes may widen as money managers buy the less-risky, shorter-term securities, they said.
The yield on the two-year note gained after Bush spoke and after Federal Reserve Chairman Alan Greenspan said an economic recovery faces ``very significant challenges.`` The note fall to 2.09 percent at 11:40 a.m. in New York and may fall to at least 2 percent, traders said. The 10-year note, more sensitive to expectations of accelerating inflation, may not benefit as much. Its yield may trade close to its current 3.99 percent level, widening the gap between the two securities to at least 2 percentage points.
The yield gap widened 36.8 basis points to 80.8 basis points in the three days after Iraq invaded Kuwait. A basis point equals 0.01 percentage point. By the time the U.S. attacked Iraq, that gap had increased to more than 1 percentage point.
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