Swine Flu Virus Infects World Stock Markets

As authorities around the world rush to work out where swine flu will turnup next, the movement of markets Monday was far more predictable. Withcases of the new H1N1 virus confirmed from Mexico to Spain — and tests onpossible cases underway from New Zealand to Britain — investors battledtheir own nerves.

Recovering slightly from earlier losses, Britain's FTSE100 index of leading shares was down just under 1% in early afternoontrading. Indices in France and Germany, likewise up on their earlier lowsMonday, were nonetheless subdued amid the global jitters triggered by thespread of the flu virus. Earlier, shares in Hong Kong closed down 2.74%.For investors already wounded by the global economic crash, news of apotential pandemic came as a further blow.

"As if we didn't have enough tocontend with," strategists at the Royal Bank of Scotland wrote in a noteto clients Monday, "it's just what we need now, a flu pandemic in themidst of the biggest financial crisis since the Great Depression." Amidthe sell-off, travel industry stocks fell sharpest. Shares in Lufthansa,Europe's second-largest airline, tumbled by more than 12% beforerecovering slightly.

Those of rival British Airways pulled back fromsimilar lows, trading 8% down by mid-afternoon in London. Tour operatorsand hotel groups took similar hits. (See pictures of the swine fluoutbreak in Mexico.)From the volatility of global travel, investors sought the calm of safehavens. Both the dollar and the Japanese yen rose against majorcurrencies. Defensive stocks, such as pharmaceuticals, registered healthygains. Shares in Roche, the Swiss maker of Tamiflu, an antiviral drugeffective against swine flu, had climbed almost 6% by Monday afternoon.

Rival GlaxoSmithKline, which makes the influenza treatment Relenza, sawits shares rise even higher. (Read: "Swine Flu: 5 Things You Need to KnowAbout the Outbreak.")How long stocks hold those positions in the face of the threat from H1N1remains to be seen. The fact that shares hit hard early had regained lostground Monday suggests markets had earlier "responded in the time honoredfashion," says Howard Wheeldon, senior strategist at BGC Partners inLondon, namely with "a degree of overreaction.

"Given the lack of clarity over the threat posed by the virus, that'sperhaps understandable. But gauging the impact of the outbreak — formarkets and economies just as for health officials — takes time. Shouldthe virus's potential for a pandemic be realized, though, its financialimpact would be severe.As with the outbreak of severe acute respiratory syndrome (SARS), whichdevastated the Asian economy in 2003, economic consequences would bemeasured "not so much in the number of people that go down with it, orunfortunately are killed by it," says Justin Urquhart Stewart, investmentdirector at Seven Investment Management in London, but by "the impact ofthe potential [population] that could be effected. Once it starts togather momentum, it takes very little to start knocking serious percentagepoints off global trade and GDP." Right now, that's a momentum we couldall do without.