There are weeks when it is impossible to figure out why financial markets move up or down, but last week was not one of them. Whether stocks, bonds, currency or commodities, they all moved in near-perfect synchronization, responding to the latest developments in the diplomatic dance over war in Iraq.
Early in the week, tough talk from the White House and rising prospects for an imminent attack sent stocks down sharply, taking the dollar with them. Investors fled to the safety of Treasury bonds, and speculators, fearing disruption of Middle East supplies, bid up futures on oil and gas. Major stock indexes fell to lows for the year, while bond yields, which move in the opposite direction to bond prices, hit 44-year lows.
Then on Thursday, as it became clear that the United States and Britain would not win the U.N. support they sought to begin operations, the markets retraced their steps and then some. The dollar posted its best weekly gain in seven months, while the price of oil for delivery next month fell from nearly $40 to just above $35 a barrel. For stocks, it was the first weekly gain after back-to-back declines, following a particularly strong two-day rally on European exchanges.
Although the markets provided a real-time measure of war jitters among the moneyed classes, there were indications that even the economy itself has been exquisitely responsive to geopolitical cues in recent weeks. Retailers and home sellers have reported a drop-off in traffic beginning in February, and Ford announced it was cutting production targets by 17 percent in response to lagging sales of cars and trucks. Airlines and hotels reported that the pace of cancellations seemed to track almost precisely the increase in diplomatic and military activity. Industrial production, bank lending and advertising commitments suddenly show no growth -- or they even decline. High-tech companies that detected an upturn in orders earlier in the year have revised their forecasts downward. And in its latest survey of consumer sentiment, the University of Michigan found it at its lowest point in more than a decade.
"We've had a month of virtual paralysis waiting for something to happen," Kenneth Lewis, chief executive of Bank of America, complained late last week. "The economy has stalled."
The Federal Reserve, at its meeting this week, could try to give the economy a jolt with another drop in interest rates. But Fed officials note that rates are already declining on their own, and the effect of any move in the federal funds rate is likely to be swamped by geopolitical events.