parmveer.sunnar's picture

Geopolitical uncertainty past and present

Following on from the terrible attacks in Paris on Friday many were left baffled by the markets seemingly limited response to the atrocity. For example the decline in EURUSD was not as steep as initially expected. In terms of the wider economic impact going forward, it is still uncertain how deep rooted the impact of the attacks will be as markets so far seem unfazed. Although it is likely that that the retail, tourist and transport sectors within both France and Europe will suffer for the remainder of 2015 and possibly the beginning of 2016. Although such events can never be fully priced into global financial markets it is the case that more Geo-Political uncertainty is definitely more priced into financial securities, especially after the 9/11 terror attacks. Therefore it is useful to assess the impact of a similar event to highlight that markets do not always behave as the majority of people would expect.

Specifically it is useful to look at the impact of the 07/07 2005 London bombings as many were also surprised by the markets relatively muted reaction to the terror attacks. In terms of financial markets, Sterling dropped slightly as evidenced by the Cable chart below; however losses were short lived as a double bottom was soon formed ahead of a sharp rally in early August. Special measures were enacted by the London Stock Exchange due to the FTSE 100 dropping around 200 points immediately following the attacks, marking the biggest drop since the Iraq invasion. However by the end of the day the FTSE had recovered a significant portion of these losses as it was down only 71.3 points by the end of the trading day. It was later reported (July 09th) that the Bank of England, HM Treasury and FSA implemented an emergency plan following the attacks to keep UK markets trading.  

Now it is too early to start predicating how markets will respond to these attacks, especially as we are still hearing of police raids within Paris and unfortunately there is a real possibility of further attacks especially considering that a number of European nations remain on high alert. However in the near term it looks as if markets are coping with this uncertainty as liquidity remains normal and exchanges remain open for business. 

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