February 23rd, 2011
03:34 AM GMT
(CNN) – After mass defections within his own government following the deaths of hundreds of unarmed protesters, Libyan leader Moammar Gadhafi has pledged to hold onto power or “die a martyr.”
Those words have had a calamitous effect on world markets. Stocks globally suffered their worst performance Tuesday in months; investors from Hong Kong to London and New York sold en masse as energy uncertainties ate away at world appetite for risk.
The turmoil has pushed oil prices near two-and-a-half year highs, as the OPEC basket of crude oils rose above $100 a barrel for the first time since the financial crisis. Stocks of airlines like Delta, United Continental and U.S. Airways all lost more than 5% as airlines shed $2 billion in market value on Tuesday alone due to the specter of higher fuel prices.
The VIX index, also known as the “fear” index in monitoring volatility in the markets, jumped in its biggest one-day gain since May, rising 27% on Tuesday.
With the Middle East in turmoil for weeks, why the strong market reaction now? As CNN’s Jim Boulden explains, Libya is an OPEC nation, with the largest proven oil reserves of any African country, and an important source for European nations and China: 32 percent of Libyan oil exports go to Italy, 14% to Germany, 10% to France and China, and 5% goes to the U.S.
What hasn’t happened so far has been a protracted sell-off in the markets. The question today is whether the sell-off continues.
“It could be the beginning of [a] correction because the markets have needed a catalyst, it’s needed a reason, and it’s not paying any attention to the macroeconomic data,” Kenneth Polcari, managing director for ICAP in New York, told CNN’s Felicia Taylor. “Markets have been up 40% since August and [economic] reports have been mixed at best.
“What’s happening in the Middle East has begun that process – people are getting nervous, it seems like its spinning out of control,” Polcari said.
So far, it appears traders have priced Middle East tensions into the market, hence no sustained sell-off. How might this be different? Gadhafi’s willingness to spill blood.
“Look what happened in Tunisia, look what happened in Egypt – people protested, it was relatively peaceful … Libya is now out of control,” Polcari said. “News like today causes people to rush for the door.”
And therein lies the question: As Asia wakes, markets are continuing to tumble. Is this the beginning of a protracted sell-off?
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