How Do News Shocks Affect The Market?

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Unexpected or shocking news can influence the financial markets. The question is how and what exactly can be defined as unexpected? From natural disasters to information leaks, unexpected news can have a major impact on financial markets. It is almost impossible however to speculate on news shocks as they are by definition unpredictable. Even so, it is important to understand the ways in which unexpected news can affect the markets in order to devise a contingency plan for when catastrophe strikes. Here are the most common types of unexpected news and how the markets may react to those:

Natural Disasters:
Earthquakes, tsunamis and floods are among the common natural disasters which can affect a country’s currency and result in major repercussions for the local economy. Earthquakes usually have the most impact on the forex market, for example, the New Zealand earthquake from 2011 resulted in the fall of the New Zealand dollar by 2% against the US dollar. Other kinds of natural disasters such as floods and hurricanes can affect different financial markets such as crops, oil and energy prices. Back in 2005 for example, when meteorologists announced the impending arrival of Hurricane Katrina to the shores of South Florida, U.S. citizens braced for impact but when the hurricane arrived it was the Gulf of Mexico and New Orleans that suffered the dire consequences. Nearly two thousand people perished and the government announced 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, causing supply to drop and pushing oil and gas prices higher.

Terrorist attacks
Following the 9/11 attacks, US authorities decided to close the stock market for four days and through the weekend. When the market reopened, 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. For the currency exchange and stock markets, news shocks also 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.

Leaks and rumours
Rumours can have the same effect on stock prices as official announcements, therefore investors are always looking to get the scoop before a major announcement. Leaked information or rumours are one of the most unexpected news types which can send stock prices plummeting or soaring. For example: In April 2015 Twitter’s stock price plummeted 18% in the hour before the close of trading after the company’s disappointing first-quarter results were leaked, resulting in a huge selloff.

Major Political Events
Unexpected elections after a corruption scandal or non-confidence vote always create chaos in a country’s economy, which in turn impacts the nation’s currency. A sudden change in the government can result in a different monetary or fiscal policy approach, therefore such events may also send currency prices in shock.

Sources: Market Watch, Forex Crunch, Investopedia

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