Markets bounce back

At 8am yesterday the FTSE 100 share index, the supposed barometer of Britain's corporate health, snapped back above 5,200. Within a couple of hours, share prices were back at the levels seen early on Thursday morning, before bombers struck to the east and west of London's financial district.

Gold, oil, currencies - everything had stabilised. When future generations of market analysts look back at the charts of this week, they will find a narrow, seemingly heartless "V"; a 24-hour "blip" as the financial world reacted to Britain's bloodiest terror attack - and then moved on. Instinctively, commentators have cited this short-lived price adjustment as evidence of the City of London's "resilience" - a calm and logical reassessment of the risk of holding various financial assets.

Here was the world's leading centre of international finance displaying an ability to absorb shocks of almost any conceivable magnitude. Inevitably, the truth about that narrow "V" is more complex, while the accompanying acceptance that share prices really should be trading at their best level in three years is ripe for debate.

There are simplistic views on how markets tend to operate in times of crisis: the common assumption has it that panicky investors sell, prices fall and greedy speculators then move in, heeding an age-old rule to "buy on the first whiff of grapeshot".

According to senior City traders, what actually happened in London on Thursday was as follows. News of the attacks led to some fast closing of large open trading positions between 10am and 11am as investment banks sought to limit exposure to the markets in the face of uncertain events. Share prices were marked lower, while the traditional "safe havens" of the financial world - gold, government debt and Swiss francs - were marked higher.

Seemingly, very little business was conducted at these extremes - the bottom of the "V" on the main chart above. Once the extent of the attacks had become clearer, and after the Bank of England had signalled "no change" on interest rates at noon, the proprietary trading desks at the investment banks, with countless hedge funds and other professional investors, reopened their market positions.

The effect was to produce a day of huge volumes, together with the snap-back in prices seen yesterday morning. While the usual rumours did the rounds about this or that hedge fund being badly caught out, the reality seemed to be that little money was lost or made in the process.

Financial markets are essentially mass, real-time opinion polls and they were presenting a consensual view that nothing had really changed. The same threats and opportunities that existed before the blasts remained in place yesterday.

Of course, there were some new or changed variables to take into account.

Erratic movements in the oil price, for example, sent out contradictory signals. A falling price hinted at a sharp downturn in global growth, reducing energy demands. Yet heightened concerns over terror raised questions over the security of supply - a factor that would send the price up.

Given that BP and Shell, due to their sheer size, make up almost a fifth of the top 100 index in Britain, oil prices have a magnified effect on our stock market - and, by extension, the financial health of just about every pension saver in the land.

Conversely, while analysts have been quick to quantify the possible impact of a sharp loss of consumer confidence on sectors such as hotels and fashion retailers, companies such as InterContinental Hotels and Next are relatively small in the market scheme of things.

There is also the peculiar market notion of "travelling and arriving" to take into account here. Share prices in companies often rise in anticipation of good news - such as strong profits - and then fall when the news is formally announced. But with the threat of a terror strike on London it seems to have worked in reverse.

Instinct says the risk of a double strike on the capital has always been much less than the likelihood of a single atrocity. So in one cold sense at least, personal sadness can certainly be masked in the markets by professional relief. In short, the threat of terror might now have subsided rather than increased.

Yet none of this begins to explain the strong performance of the stock market in recent months. The public might be fretting about the price of their houses and the size of their credit card balances but the Footsie itself has risen by more than 9% in less than 12 weeks. Analysts would point to "heavyweight" constituents, such as BP and Shell, being bolstered by the oil price - and also to big resources driven multinationals such as BHP Billiton, which happen to be listed in London. But then the FTSE All-Share index is also up 9% since April and this is a much broader measure of how corporate Britain is perceived to be doing.

That surge has been fuelled by seemingly limitless confidence that after four years of stagnation, company profits are on the mend and that plenty of mergers and acquisitions are again in prospect.

This weekend, around the subdued streets of London, most people will find that very difficult to understand.