World markets reel in aftermath

"I believe that this shock is temporary," says Yoshinobu Ikeda, a securities company employee lingering after lunch outside the stock exchange.

In Europe, markets seesawed on Wednesday, in some cases picking up some ground lost the day before. Just after the attack, investors sold stocks, causing prices to plunge. Within minutes of the catastrophe, the London FTSE-100 lost 200 points, and by the end of the day, Europe's leading stock exchange suffered a record one-day point drop. The German index Dax fell 8.4 percent, the biggest loss in 12 years, and in Amsterdam, Milan, and Zurich, the markets fell 7 percent. The biggest losers were insurance companies, while airlines also took heavy losses.

"It's obvious that a market left without Wall Street is a market without guidance," says Norbert Walter, chief economist for Deutsche Bank Group in Frankfurt. "The center of the trouble is the US, therefore it would be very important to see the reactions of Wall Street in order to derive what it implies for other places."

Adds Mr. Walter, "In my view, we've been in a recession anyhow. This will make sure that the recession is deeper and more prolonged."

When compared with past economic downturns, there are reasons to believe that this one could be better managed. For one, there are price restraints in place that prevent the stock market from falling too much in one day. "In the old days, they could just go into freefall, so they've imposed these limits," says Ginsberg in Tokyo. But that can only prevent the market from losing

STOCKS PLUMMET: A passerby watches the Hang Seng Index in Hong Kong yesterday, which saw its biggest one-day drop since the Asian financial crisis.

more than 10 to 15 percent in a day. That means that the market may not crash all in one dark day, but it easily could take a slower, equally disturbing fall over the space of days or weeks.

In times of crisis, money may leave the stock market, but it doesn't disappear. Instead, it flows into liquid assets with which people feel safe, such as government bonds, cash, and gold.

"We are likely to see a flight to quality, a flight to cash and government stock," says David Brickman, a credit strategist with PaineWebber in London. "How long this sort of liquidity crunch will last, we can't say, but this is the gut reaction. It's natural for people to prefer the safest haven."

The leap in oil prices, which jumped by about 10 percent after news of the incidents, indicates what investors expect will happen: The Bush administration may find a group or country that is directly or indirectly responsible for the terrorist attacks and hit hard.

With most fingers pointing in the direction of Islamic radicals in the Middle East, that raised concerns that oil shipments or production may be affected.

"It does imply," says Gale, "that people are expecting the US to retaliate somewhere in the Middle East."

While the fears are many - more bankruptcies, market volatility, and a sharp rise in interest rates due to a rise in insurance premiums - there are also hopes that intelligent management could stop a financial crisis from mushrooming.

Some analysts trust that central banks will add to the money supply to prevent demands for liquidity from wreaking more havoc.

A crisis-management office was set up at the Bank of Japan, which promised to provide ample cash in the money market. The European Central Bank acted in the same way for the 12 nations that share the common euro currency, boosting European markets that had opened lower early Wednesday.

Many advised investors to wait and see. "It's obviously a very dodgy time for markets," says Mike Lenhoff, chief portfolio strategist for Gerrard, an asset management company in London. Trading in Europe was slow yesterday as investors waited for a US response.

"Unless the world goes down the plughole, I would have thought people are going to just sort of sit on it, and wait and see how things develop."

Hana Kusumoto in Tokyo and Lucian Kim in Berlin contributed to this report.

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