Terror and Markets: Don’t Rule Out a Stock Market Crash Just Yet

Stock Market Crash Just YetFallout from Terrorist Attack Could Ignite Stock Market Crash

How will the international markets react over the next few days in the wake of the latest terrorist attacks in Paris? How will bonds and currencies, especially the euro, perform? The attacks in Paris have altered the political and economic scenario in France. The move could force the entire eurozone, and with it the global markets, to confront the reality that the Islamic State has brought the war in Syria and Iraq to the heart of the West. A global stock market crash is not off the table.

While the Paris attacks have served as a wakeup call that the West cannot let down its guard, the war will not be quick and it will have repercussions on the markets. The fear is that another attack could prompt panic selling. This leaves the markets as prey to the fear of more attacks, which could prompt panic selling, similar to what happened after the September 11, 2001 terrorist attacks on New York and Washington.

This Could Trigger the Next Stock Market Crash

The November 13 Paris attacks have reminded everyone that geopolitical relations are important in understanding the markets. One of the most significant relationships to consider is the one between Iran, Russia, and Saudi Arabia. How will Saudi Arabia react in the face of Iran’s growing stature as one of the preeminent powers fighting the Islamic State and will the kingdom finally start to tighten production to increase oil prices as Russia (and Iran) would like?

Fears of a strengthening Islamic State within European borders will alter Western, and especially American, relations with Russia. Since the start of the Syrian civil war, Russian president Vladimir Putin has argued that the rebel forces were largely made up of radical Islamists who have no interest in democracy whatsoever. Meanwhile, the April/May 2017 French presidential election is going to push Hollande, who will face a noted and strengthened anti-immigration rival candidate Marie Le Pen, to adopt a heavy military response against ISIS, raising rather than reducing risk.

The Paris attacks have especially woken up the French government, which until recently was one of the most adamant foes of the Asad government. Paris has changed the geopolitical balance and this will influence how central banks decide to act, affecting stocks, bonds, and currencies. Nevertheless, such is the nature of geopolitical risk; there are always hidden variables that can influence investors’ expectations.

Stock exchanges, government bonds, and the euro/dollar exchange will be affected in the short- and medium-term in the wake of the terrorist attack in Paris. Crystal balls would help in determining the specifics, but as few analysts are equipped with these, the key to understanding the markets’ course is that political and economic scenarios have changed, as have investors’ fears and expectations.

After September 11, Wall Street lost seven percent after a five-day shutdown in panic selling. The possibility of a panic sale exists in Europe, because all European capitals are on high alert as the possibility, or rather the probability, of another attack is high.

From a financial perspective, the Paris attacks have weakened investor confidence unexpectedly and the European Central Bank’s (ECB) reassurances, along with the hint of further quantitative easing by ECB governor Mario Draghi, may not be enough to reassure the markets.

The markets’ ability to withstand the uncertainty will ultimately depend not only on the speed and effectiveness of Europe’s response to terrorism, but also on the vision of the central banks and institutional investors. If France, as President Hollande has warned, engages in an intensified war against the Islamic State in Syria and Iraq, it will fall into the trap set by terrorists, who are inviting just this kind of response in order to trigger retaliation by the many radicals that are already living in Europe.

In short, a purely military reaction, as Hollande has hinted, will cause more uncertainty in the long-term. Nevertheless, if France reacts in a manner coordinated with Russia, aimed at restoring political stability in Syria and neutralizing the threat from ISIS and other radical groups through both political and military means, it will help to reduce investor risk and market volatility.

One of the major geopolitical shifts emerging from the Paris attacks will be the rapprochement between Europe and Russia, which could perhaps happen faster than anyone could have imagined. France even canceled the sale of aircraft carriers to Russia over Moscow’s meddling in Ukraine.

Ukraine has fallen off the geopolitical map as Russia’s fight against ISIS in Syria has elevated its status as the international power doing the most to stop the spread of terrorism. To this effect, the EU will be under pressure to ease sanctions against Moscow, while prompting the Saudis to allow oil prices to rise in order to address Russian needs.

Don’t Rule Out a Stock Market Crash

On Monday, the price of gold rose about one percent, hitting a high of $1,093 an ounce. Other precious metals prices, like those of silver, platinum, and palladium, also rose by more than one percent. The euro has come under heavy selling pressure following the attacks in France, with the single currency down by nearly one percent to 130.62 against the yen, the worst level the euro has seen since late April. The Swiss franc, another stability currency in Europe, has suffered because of the geographic proximity between Switzerland and France.

For the time being, oil prices, which usually rise when geopolitical risk increases in the Middle East, have not budged, even as France launched air strikes against the Islamic targets in Syria on Sunday night. These strikes had the potential to hit the oil infrastructure in that area, thus damaging the supply of oil in Syria. The geopolitical calculus, involving closer ties between Russia, the EU, and Saudi Arabia, over the threat from ISIS suggests oil prices will not delay their rise for much longer.

The bottom line: don’t rule out a stock market crash in the coming weeks. Perhaps more than any other time in recent months, the conditions are ripe for investors to shift their attention to assets perceived as safe, driving up the price of gold and oil, while the euro (EUR) endures major selling pressure.

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