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Market Response to Bhutto Death: Wait & See

Thursday, 27 Dec 2007 | 3:00 PM ET

Markets have had a relatively muted, though negative response to the assassination of former Pakistan prime minister Benazir Bhutto, but the real fallout will not be seen until it becomes clear whether nuclear-armed Pakistan can remain stable.

"I don't worry about the loose nuke here, because the [Pakistani] army keeps pretty good control of them," said NBC News counterterrorism analyst Roger Cressey in a telephone interview.

"What you do worry about is serious political stability at the top of the country, which could spin out of control."

Equities weakened ahead of the opening bell as reports first crossed about Bhutto's death, and remain lower as economic data also disappointed investors.

U.S. Treasury yields slipped as buyers moved into bonds in a flight-to-safety play, and the dollar remained under pressure.

Gold prices moved slightly higher.

Crude oil also rose, though it moved higher after 10:30am ET inventory data was released, showing smaller-than-expected U.S. supplies.

Reuters reported from London that Pakistan five-year credit default swaps widened by at least 30 basis points and were continuing to widen.

Bhutto was killed in a gun and bomb attack after a political rally in the city of Rawalpindi. Street violence erupted in Karachi, Pakistan's commercial capital, following the killing and supporters of Bhutto attempted to block roads in protest.

Karachi has been one of the world's best performing markets and has risen 47 percent so far this year.

Bhutto had returned from exile in October and was viewed as the front runner for prime minister in upcoming elections next month. She had forged a troubled alliance with President Musharraf that would have allowed for a power sharing arrangement between herself, Musharraf and Gen. Ashfaq Kiyani as head of the Pakistani military.

Bhutto's Pakistan's Peoples Party suspects her death was the work of Islamic militants who previously attempted to kill her.

Some radical factions have condemned Bhutto for her close ties to Western powers (particularly the U.S.) and her crackdown on pro-Taliban and pro-Al Qaeda radicals.

Andrew Busch, global foreign exchange strategist at BMO Capital Markets, said one of the biggest immediate market reactions was the move into the euro.

"The combination of the weak U.S. data, with housing prices from yesterday, and then we got mortgage applications. Durable goods were really soft. Jobless claims were really soft...You've got global uncertainty on top of that and it really ignites a euro rally," said Busch, a CNBC contributor.

Busch said India, also nuclear-armed and often at odds with Pakistan, has reason to be concerned. "All of it makes people worried about stability and who's in control," said Busch.

UBS head of floor operations Art Cashin said on "Squawk on the Street" this morning that Pakistan has been on the top of his list of worries for the past couple of months -- but that traders today are taking a wait and see attitude.

"An event like this is not a five minute reaction. This thing is going to linger in the background for weeks," Cashin said. "I've been pounding on the table for two months that this may be the most dangerous country in the world right now."

Cressey said one of the next things to watch for is Musharraf's reaction. Cressey said Musharraf will be blamed by Bhutto supporters whether he is involved or not, and there are likely to be reprisals. It will also be important to see if radical Islamists were behind the attack.

"It further puts Musharraf in a precarious position and what move he makes in response to this is going to be very important not only to the signal he sends domestically but to the signal he sends internationally."

Questions? Comments? marketinsider@cnbc.com

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