How Natural Disasters Impact the Markets
On 1 January 2024, a 7.6 magnitude earthquake rocked the west coast of Japan, killing 100 and leaving hundreds of thousands without power. The human cost of such tragedies is, of course, the most important factor and it’s incalculable. But today, we’ll focus on how natural disasters impact the markets at large. Then, we’ll give you the lowdown on market events this week.
The local impact of the 2024 Japanese earthquake
The Japanese government doesn’t yet have a clear timeline for the recovery of businesses and the power supply in Ishikawa — the region in which the quake had its epicentre. 24,000 buildings in the prefecture are still without electricity.
Yet, Industry Minister Ken Saito stated that 80% of the 200 companies with plants in the quake-hit areas, including makers of machines, semiconductors and textiles, have resumed production or would resume soon.
Unlike the 2011 East Japan earthquake and tsunami, which triggered nuclear plant meltdowns in Fukushima and led to a nationwide power crunch, this quake’s impact has been largely regional. That said, the 225-issue Nikkei Stock Average closed down 175.88 points, or 0.53 per cent, from Friday at 33,288.29.
JPY also weakened versus the USD. At 5 p.m., the US dollar fetched 143.37–39 yen compared with 143.25–35 yen in New York at 5 p.m. on Wednesday. Which gave exporters in Japan a boost.
USD/JPY
Source: Tradingview
The general impact of natural disasters
Earthquakes and tsunamis, as well as phenomena like hurricanes, and floods, have the potential to wreak havoc on economies and financial markets worldwide.
Like the 1st January earthquake, these events can cause widespread damage to property and infrastructure, disrupt supply chains, and lead to economic uncertainty, all of which can have a significant impact on stock prices, currency exchange rates, and investor sentiment.
In reality, the impact of these random events can be felt both directly and indirectly.
Direct
● Damage to property and infrastructure. This can lead to significant losses for businesses and individuals, which can reduce economic output and consumer spending. This, in turn, can hurt corporate earnings and stock prices.
● Supply chain disruption. When transportation networks break down, it can make it difficult for businesses to get the goods and services they need to operate. This often leads to shortages of essential goods, higher prices, and increased uncertainty among investors, all of which can negatively impact stock markets.
● Increased insurance costs. Natural disasters can lead to increased insurance premiums, which can put a strain on businesses’ budgets and reduce their profitability. This can also make it more expensive for investors to invest in stocks, as they will have to factor in the higher insurance costs.
Indirect
● Government response. National governments often respond to disasters with emergency spending and tax cuts. In the short term, these measures can be vital to the economy, but long term, they can also lead to higher government debt and inflation. This can make investors more cautious and lead to stock market volatility.
● International impact. Natural disasters in one region can have ripple effects across the globe, affecting businesses and economies that are interconnected through supply chains, trade, and tourism.
Examples of natural disasters affecting the markets
Unfortunately, history is littered with natural disasters that have wreaked havoc on the human population, economies, and financial markets. Here are a few notable examples:
#1 Hurricane Katrina (2005)
Hurricane Katrina caused widespread damage to New Orleans and the surrounding region, resulting in losses reported to be as high as $125 billion. The hurricane also led to a decline in the stock market and the depreciation of the US dollar.
#2 The Asian Financial Crisis (1997–1998)
The Asian Financial Crisis was triggered by a series of currency crises in Southeast Asian countries. The crisis was exacerbated by several natural disasters, including the 1997 Indonesian earthquake and the 1998 floods in Thailand.
#3 The Indian Ocean Tsunami (2004)
The worst natural disaster in recorded history in Indonesia, Sri Lanka and Thailand. The total economic cost of damage was estimated at $9.4 billion (US). The tsunami killed over 230,000 people and had a significant negative impact on the national economies of the affected countries.
#4 February 2023 earthquake in Turkey (2023)
The aftermath of this 7.8 magnitude quake saw the country lose 1% of its GDP and the Lira hit its lowest point.
Have your trades been affected by natural disasters?
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Top fundamental events this week
Here are all of the key events in what seems to be quite a quiet week ahead.
Monday
● EUR — German Balance of Trade
Tuesday
● CAD — Balance of Trade
Wednesday
No major events are scheduled
Thursday
● AUD — Balance of Trade
● USD — Inflation Rate MoM; Core Inflation Rate MoM; Inflation Rate YoY; Core Inflation Rate YoY
Friday
● CNY — Chinese Balance of Trade
● GBP — Manufacturing Production MoM; Manufacturing Production YoY; GDP MoM
● USD — PPI MoM
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