Caution in victory

Bin Laden: Osama bin Laden's death is an important landmark which leaves hope for the Arab spring intact. The initial, obvious, response is to expect celebratory gains and for global equities and commodity prices to advance. But, while the medium-term outlook is undoubtedly improved — for the US and the rest of the world — bin Laden's death may heighten investors' sense of risk in the near term, bolstering the dollar and curbing flows into speculative assets.

In recent weeks and months, markets have been partying on something bin Laden himself might have welcomed: a plunging dollar. Traders have been shorting the greenback and going long a host of other assets, not least in emerging economies. Last week Ben Bernanke, the Federal Reserve chairman, fuelled this tendency by suggesting the Fed was in no hurry to raise its policy interest rate. US dollar weakness has been a big factor in record prices for silver and gold and the highs for currencies like the Australian and Singapore dollars. The euro is at $1.48, despite the great difficulties of the euro zone periphery.

Bin Laden's death doesn't change the broad market picture materially — the US interest rates will remain very low — but it may, at least temporarily, alter the market mood. It could make markets wary of reprisal attacks and of heightened risks in North Africa and the Islamic world. It is easy to overstate the Al Qaeda influence on world finance, however. There is little direct danger posed to the Arab spring. The ambitions of this movement are socially and economically progressive: vastly different from al Qaeda's aims. Bin Laden's diminishing influence since 2001 may also be observed in West Asia and North Africa, where tyrants are being toppled without recourse to the violent tactics, intolerance and religious extremism he represented. Though the democratisation process will be slow, and will doubtless suffer some setbacks, the Arab spring is a catalyst that brings real hope for broad-based prosperity.

Bin Laden's death is an advance that may eventually help the US economy and its currency by providing scope to reduce defence spending and the budget deficit. But, near-term market moves will depend on whether or not the risks associated with his death, bolster the dollar and curb the dollar carry trade that has been favouring speculative excesses. Prices of silver, which had become ridiculously extended, the most egregious example, at present, of speculative excess in the global economy, plunged overnight. It would not take much for silver, equities and commodities to turn tail and retreat more.

Bin Laden's death is a victory that comes with uncertain consequences in the short term. For all that, though, it is still a victory, and an important one for the world and the US.