In the City

A new era?

Tony Rudd

Since the Fleet left Portsmouth, two views have emerged in the City about the nature of the Falklands crisis through which we are now living. One is that it's just business as usual and the other is the exact opposite, that nothing will ever be the same again. In judging which is likely to be right it is necessary to look at the impact of these events market by market. The biggest waves have undoubtedly been encountered in the foreign exchange markets. Taking the sterl- ing rate against the US dollar as the key, the pound dropped straight through the sup- port level of $1.77 on the news and at one point fell below the all-important psychological level of $1.75. It is reported that the Bank of England has had to give substantial support in the markets to pre- vent the rate falling further. Over the Easter weekend itself there wasn't an operator in any world centre who went home long of sterling; everybody covered. The only posi- tions that were left open were those that left obligations in pounds outstanding. In other words people didn't mind being short of the pound but on no account were they going to be long of it. The second most obvious impact has been upon the gilt market. The experts who make their living by drawing charts still aver that the upward trend is intact perhaps so. Nevertheless the Falklands inci- dent put a five-point dent into this upward trend as this was the amount by which the market was set back in the first two or three days' trading after the news broke. Further- more, on the Monday, when the City really woke up to what was happening, no less than three whole points were wiped off most of the long issues in one trading ses- sion, which is a phenomenal drop by any standards. Clearly, some of the selling was on foreign account and therefore ties up with some of the selling of sterling on the foreign exchange market. In international markets the most im- mediate impact was on the price of gold, which ceased to look weak and suddenly put on a spurt which took the price of the metal to the $350 an ounce level. That was particularly significant because it would not have done that just on funk money leaving Britain seeking a haven abroad; this was a reaction by traders worldwide. Then we have the UK equity market, which on the whole took the upset pretty well. There was indeed a drop but at least part of the fall was recovered. The only weakness which professionals were quick to point out was that the fall was of much greater volume than the subsequent recovery and this kind of pattern is invariably taken as a sign of a market's technical underlying weakness. Of all these moves the drop in the ex- change rate was and remains by far the most significant. We have to go back to Suez in 1956 for a parallel. What forced the government to desist then from pursuing its chosen policy was the warning from the then Chancellor, Mr Macmillan, that the pound would not stand the strain of Britain being out on a political limb, isolated and on its own. There are shades of that in the present situation. Sterling is of course a much stronger currency now than it was in 1956. We don't have the accumulated holdings of sterling in foreign hands (much of them left over from the war) sloshing around world markets and waiting to be cashed in, which were such a financial em- barrassment in the Fifties. And, on the other side of the balance sheet, we now have North Sea oil which we didn't then. So a run on the pound is not the political killer today which it was then. Britain can take quite a drain without having to flinch. 011 the other hand the volatility of interna- tional markets is that much greater today and the size of money movements has

an

become enormous and much larger than It used to be, so that in terms of their de' stabilising power the flows of international liquidity can still be damaging.

A further factor which has to be taken in- to account is that this is the first crisis of

confidence to hit markets since the suspen" sion of exchange control in this country.

We have always had to contend with the

problems arising from foreigners shifting their money in and out of sterling but novi

we have the further potential difficultY

which could arise if the British themselves take fright with their capital and rush off with it to America. It has to be recognised that many investment advisers will be recommending their clients to do exactly that if the current uncertainty continues, let alone if the outlook becomes precarious; In particular it has to be borne in mind tha, this potential flight of capital could becorne a torrent if the present Government's hold on political power were to be called serious- ly into question. The City recognises this and for that reason does not rule out the reimposition of exchange control in certain circumstances. Unfortunately, one thing leads to another, so that if more people come to expect a return of exchange control then they will anticipate it and it will be a self-fulfilling prophecy. The problem for the City is that the smooth functioning of its markets and the

maintenance of an even tenor of confidence,

depends very much on the business-as-usual thesis turning out to be right. The Govern- ment's action in blocking Argentinian balances and commercial payments has already upset the international trading coll. munity (just as much as America's action ID similar circumstances, freezing the Iranian balances, upset the international commoll. ty). People who leave their money in an In- ternational centre like London are looking,

for security and calm. If they come to fee'

that instead they are going to be exposed to political adventure they will look to another

centre. The only point which is still in Lon"

don's favour is that there aren't very many other centres left. New York is susceptible to the Iranian kind of action; France, which might have been an alternative, has 011,e socialist; Switzerland only means really having one's money in New York at one remove; Hong Kong is nobody's favourite now that attention is beginning to concen- trate on the expiry of the lease on the Nevi Territories. Which leaves Japan. Perhaps the moral is that security in this world Is becoming daily more scarce.