As Storms Rip Through Australia, Impact of Weather on the Financial Markets Is Top of Mind

From the desk of Robert, Managing Director (APAC) at easyMarkets.

A devastating storm across eastern Australia over the weekend caused severe flooding and left at least three people dead, reminding us all that we are all at the mercy of mother nature. While it’s impossible to equate the loss of life with the financial markets, Australia’s latest devastation has forced us to remember how weather influences our trading and investment decisions.

Climactic conditions play a direct role in the commodity markets, particularly agriculture. The recent bout of El Nino has tested how soft commodities such as wheat, coffee, sugar, cocoa and soybeans react to twisted weather patterns.[1] El Nino has already caused a major spike in raw sugar prices, with uneven weather patterns causing severe shortages throughout Latin America.[2] For a country like Venezuela, which is reeling from its worst socioeconomic crisis in recent memory, the sugar shortage has had catastrophic consequences. This has prompted Coca-Cola to abandon soft drift production in the country.[3]

Severe weather patterns like the one we saw in Australia this weekend have more direct consequences than crop yield. Insurance companies have shouldered a huge burden as a result of extreme weather patterns, and this is often reflected in underlying share prices. Shares of Insurance Australia Group plunged 2.2% Monday in response to the storms. Suncorp declined 1.7%, QBE shed 1.6% and Steadfast Group finished down 1.5%.[4]

Obviously, this isn’t just a one-off. Since 1980, insurance companies have seen the total cost of natural catastrophes skyrocket by some $870 billion in real terms. Rising sea levels, a warming atmosphere and devastating floods have forced insurance providers to adopt new business models to weather the storm (both literally and figuratively).[5]

Extreme weather events have been known to cost insurance companies billions of dollars. And we’re just talking about singular events. According to some estimates, many US hurricanes have cost insurance companies $10 billion or more in losses. This not only impacts the performance of individual insurance stocks, but also leads to higher premiums. [6]

The year 2016 has been a relatively mild year in terms of severe weather patterns. As a result, insurance has outperformed most other financial sub-sectors listed on the S&P 500 Index.

Whether you’re trading commodities or individual stocks, it’s important to be weary of the weather. Extreme weather can also disrupt economies, reducing overall consumption and trade. These negative forces will no doubt make their way to the financial markets in one way or another (i.e. investor fear, negative economic data, etc.). As we begin the Atlantic hurricane season, investors should be monitoring their local weather channel in addition to the financial calendar.

[1] Lucy Craymer (August 5, 2015). “El Nino Tests How Soft Commodities Weather the Storm.” The Wall Street Journal.

[2] Nikolas (April 12, 2016). “Eli Nino Causes Spike in Raw Sugar Prices.” Forex.info.

[3] Evdokia Pitsillidou (June 3, 2016). “Trader’s Timeout: Sugar Prices Leave Bitter Taste.” Finance Magnates.

[4] Chris Kohler (June 6, 2016). “Wild weather hits insurance stocks.” The Australian.

[5] Trevor Maynard (January 31, 2014). “Extreme weather is a reality – the insurance industry must adapt.” The Guardian.

[6] Mindy Lubber (August 30, 2012). “Wild Weather A New Normal And Insurance Companies Must Act.” Forbes.

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