It was August of 2005 when meteorologists announced the impending arrival of Hurricane Katrina to the shores of South Florida, where I was then residing. As we usually did when a storm of this magnitude was announced, we stocked up on non-perishable food, water, and batteries and shuttered in our windows. We were as ready as one could be before a hurricane, but Katrina had different plans and deviated towards the Gulf of Mexico and hit land in New Orleans, becoming the costliest and most devastating natural disaster in the history of the United States.
Besides killing more than 1,800 people and causing over $80 billion in property damages, Hurricane Katrina severely damaged U.S. refinery and oil production capacity in the Gulf of Mexico. Likewise, the crude and natural gas infrastructure were majorly impacted.
I took an economics class in college and while my strength was more in the humanities than in numbers, the law of supply and demand had made absolute sense and I knew almost certainly that if oil production was affected by Katrina, supply would be lowered, causing prices to shoot up. I still look at charts of the days and weeks following the devastating events caused by Hurricane Katrina and I must say, the effect caused, made absolutely no sense. Prices of oil following the hurricane fell! They fell! Why would they fall if the laws of supply and demand have been proven over a thousand times?
We saw a similarly incoherent event after the terrorist attacks of 9/11. Following the attacks, US authorities decided to close the stock market for four days and through the weekend. We have been indoctrinated to believe that good economic news make the stock market go up, while bad economic news make it go down, so we expected the market to take a nosedive upon opening, and guess what? It did! It brought about the biggest losses ever seen in the history of the NYSE. However, by the time the market closed on the next trading day, prices had regained
unexpected strength, and before investors got their heads wrapped around the fluctuation, within a month of the tragic events, the market regained pre-9/11 price levels, leaving analysts nothing but confused. So now, we ask ourselves not only whether dramatic news events affect financial markets, but how long do these shock waves last.
For the currency exchange markets, shocks have significant implications on policy, such as inflation, interest rates, and trade, just to name a few, so the effects of events on the FX market are critical.
These are merely two examples, but similarly discordant scenarios were seen after bombings, president assassinations and similarly shocking historic events. So can we, without the shadow of a doubt, confirm that shocking news send waves through the financial markets? I’ll let you be the judge of that.
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