LONDON, March 20 - Investors shifted focus on Thursday from the opening salvo of war in Iraq to worries about how long the conflict would last, putting many financial markets in a holding pattern ahead of a broader U.S.-led offensive. The lack of clarity about what was to come in Iraq, where U.S. forces launched selective missile and aircraft attacks, sent European stocks swinging in a tight range but fuelled demand for safe haven government bonds. Oil prices, which fell sharply to three-month lows after the U.S. attack, pared back their losses although the overall trend has been to eat away at the war premium that sent prices sky- rocketing this year.
The dollar was holding just below two month highs against the euro and the Swiss franc after earlier falling nearly one percent against both currencies. U.S. President George W. Bush warned that the war could be longer and more difficult than expected -- a scenario that many financial market players have feared. Britain, Washington's main ally in the war, said the attack on Iraq would widen quickly. For a snapshot of the latest developments in the Iraq crisis, please click on [IQ/UPDATE]. "We're in the early stages of war. It is not exactly clear how quick or how prolonged it's going to be," said Sarah Hewin, senior economist at American Express Bank. Even the usually super-charged hedge funds were waiting. "Most hedge funds are sitting on their hands at the moment. We don't know what's going to happen to the market," said one industry executive.
STOCKS SHUFFLE
European stocks fell at their open after five days of gains in the run up to war but then traded in a narrow range around Wednesday's close. U.S. stock futures were giving mixed signals about Wall Street's open. Investors had been hoping for a so-called "relief rally" once uncertainty about whether there would be a war ended. But the new uncertainty held them back when it became apparent that Thursday's attack was limited.
"I don't see any reason to buy more equity until we get some clarity on how this war is going to go," said an equity trader at a German bank. Both the FTSE Eurotop 300 index of pan-European blue chips and the narrower DJ Euro Stoxx 50 index were essentially flat, drifting from positive to negative territory and back. They have seen gains of as much as 16 percent since last week. Earlier, stocks in Asia closed higher on initial hopes the war would end quickly. Tokyo's benchmark Nikkei average closed 1.79 percent higher at 8,195.05.
OIL, BONDS DOLLAR
Oil prices were lower but well off their earlier losses of more than a $1 a barrel. U.S. crude oil for April delivery was down 71 cents at $29.17 a barrel while Brent crude for May lost 20 cents to $26.55 a barrel. Rising oil prices have sparked concern because of their potentially negative effect on world economic recovery. Worries still remained about the effect of war in the Gulf on oil. "What is foremost in oil traders' minds is the impact on Iraqi oilfields," said Peter Gignoux, head of the London Energy Desk at Salomon Smith Barney. Euro zone government bond yields fell, backing away from two-month highs reached earlier. Benchmark 10-year Bund yields were down four basis points at 4.19 percent, reversing earlier increases to two-month highs at 4.26 percent. The interest rate sensitive two year Schatz yield was down five basis points at 2.58 percent, below two-month peaks set a day ago at 2.69 percent. The yield on the 10-year T-note was down 4.6 basis points at 3.9395 percent.
"The next moves in the bond market will be dependent on the duration and dirtiness of the war," said one trader. On the foreign exchange market, European traders pushed the dollar down from two-month highs against the euro and the Swiss franc hit in early trade. The dollar was at $1.0622 to the euro and 1.3842 Swiss francs. Spot gold was more or less flat at $335.25/336.25 an ounce.//www.rauters.com