Fundamental analysis is formed by interpreting events that affect the markets. These include economic data releases, natural disasters and geopolitical events such as war. The terror attacks on France on Friday 13 November was an example of a geopolitical event and its effect on the markets was characteristic of how the markets react to news of this nature. Two days after the attacks, France retaliated with air strikes against Islamic State targets in Syria further exacerbating the effects on the markets.
Fundamental analysts will tell you about a few tried and tested theories. In times of crisis, investor confidence is shaken and safe havens are sought. Havens like gold, the Swiss Franc, the US dollar and Japanese Yen. When there is unrest in the Middle East, oil prices soar due to supply disruptions. The currencies of the affected regions will take a tumble. And global shares take a dip.
The Monday following the events in Paris and Syria proved that there is substance to these theories. When the markets opened we saw some expected movements. The euro took an almost seven-month dive against the US dollar falling to $1.06860. It took a similar beating against other safe haven currencies dropping 0.4% against the CHF and was also down to 130.66 against the JPY, its lowest since April earlier this year. Not surprisingly, spot gold which has been suffering lately increased by 1%. And as expected, Brent Crude, the benchmark in oil prices, rose by 20 cents to $44.68 a barrel.
What did buck the trend to some extent was shares. While global shares retraced slightly, both European and U.S. equity losses were modest. There was however significant pressure on Asian stocks that fell to a six-week low.
What can be gleaned from this example is that while dramatic events can and do move the markets, they cannot be looked at in isolation. Even before the attacks the euro was feeling pressure on the expectation that the ECB will increase its Quantitative Easing programme next month. US stock drops may also be attributed to the expectation of a Fed rate hike in December, while Asian stocks are also reacting to the Japanese recession – the second in two years.
It’s early days after the news of the Paris attacks and while the markets seemed to have rolled with this fundamental event, there may still be more impact to follow. As Europe heads into its festive holiday season, there may be consequences for consumer spending, leisure and travel.
2015 has been a volatile year for the markets and at the time of writing there are just a few weeks left. With a divergence in Fed and ECB policies, political unrest and uncertain commodities markets, then fundamental traders have a lot to keep an eye on.