The story of the killing of an Iraqi leader in a car bombing on Monday, followed by news of record high oil prices, caused investors to imagine nightmarish narratives of the future. As a result, global stocks plunged, slicing more than 1 percent off the dollar against the euro and driving investors into what is regarded as a safe-haven - bonds. 

Markets plunge

In the United States, all three major stock market gauges closed at their lowest levels this year. European equities also fell to 2004 lows, before trimming some losses. And stocks were hurt in Tokyo, Hong Kong, Argentina and Brazil. 

"My big concern a few weeks ago was the stock market was too focused on interest rates, but clearly it's now focused on instability in the Mideast, which is leading to higher oil prices," said Robert Mikkelsen, senior managing director of equity capital markets at The Advest Group to Forbes..

In India, stocks on the Bombay exchange fell as much as 17 percent -- the worst drop in its 129 year history -- before closing down 11 percent, on concerns about the incoming government's economic policies. 

Markets rebound

In another strange twist, the major stock indexes rose from their session lows in mid-morning trading after the U.S. military reported an artillery shell had exploded in Iraq, releasing a small amount of the nerve agent sarin. It was the first news of the discovery of any of the weapons on which the Bush administration made its case for war. Were investors thinking that this bad-news story would somehow make the story of Iraq come right?

Then in another twist on Tuesday, shares in India ended up 8.6% to close at 4893 points, amid news that Congress party head Sonia Gandhi is reconsidering whether to become the country's prime minister. Suddenly a new and more positive story was making its way into investors' minds.

Bottom line

The fundamentals of the world economy have not changed, but storytelling can send financial markets plunging -- or soaring.

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