Financial markets are notoriously fickle and events ranging from geopolitical crises to weather patterns can impact them dramatically. Right now, the El Niño weather phenomenon is in effect and is estimated to stick around until around the second quarter of this year, and it’s already having an impact on certain market sectors and commodities.
Some effects of El Niño can be predicted in advance, such as California receiving precipitation after its long drought spell and Southeast Asia seeing just the opposite with less rainfall. The severity of the current El Niño effect is one of the strongest on record and many scientists have attributed the wave of intensifying weather to changing global climates. Whatever the cause, the effect it’s having on the global economy is significant.
Exposed Sectors and Potential Bear Markets
Normally, short-term weather events don’t give investors much pause, but El Niño encompasses a multitude of geographic regions and impacts economies for months on end. According to data from Brookings Papers on Economic Activity, extreme weather events can add or subtract as many as 100,000 jobs to the U.S. employment figure – one of the most closely watched statistics by financial professionals.
El Niño impacts agricultural commodities the most. Citi Research published a report in October showing how returns in certain grain commodities fluctuated between 10% and 25% higher during El Niño years. Flooding in key U.S. agricultural regions like California, mixed with drought in the Central Pacific that typically impacts Australia, India, Indonesia, Japan, and other nearby areas, makes for temporary spikes in commodity prices due to failed crops and supply disruptions.
Although the results are somewhat mixed, studies have shown that the Pacific regions typically suffer during El Niño, while the U.S. and Canada can actually benefit due to increased rainfall in an area that struggles with regular droughts. Of course, too much rain can be negative as well but so far its impact hasn’t been negative for the U.S.
The winter we’ve seen this year is mild compared to previous years with unusually warm temperatures affecting not just the U.S. but many other parts of the world as well. While it’s good news for businesses that operate in places like New England, other parts of the world like South Africa are seeing drought conditions and food shortages. Even in the American Midwest, flooding has been an issue over the past few months and could very well continue to impact the region until the summer months.
The Bottom Line
One thing seems clear when an El Niño event is taking place – watch for inflationary spikes in agricultural commodities and short-term fluctuations in companies that rely on resources such as grain and corn. Right now, the biggest impacts we’re seeing are in palm oil, coffee, rice, and U.S. grain production. Another piece of the puzzle is that in years following an El Niño, there’s another weather event that can occur known as La Niña that is often bad news for U.S. grain crops, causing prices to soar. Investors will need to keep an eye out towards the later stages of winter for signs of La Niña to see how it might impact commodities going forward.
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