Financial markets in Europe Monday have rebounded from a sharp drop at the opening in the wake of the terror attacks in Paris on Friday night.
France’s benchmark stock index, the CAC 40, fell 1.1% at the opening bell but had recovered to be up 0.1% by late morning in Paris. Other European markets made similar moves. The U.S. 10-year bond yield, always the bellwether for demand for ‘safe haven’ assets at times of uncertainty, fell to 2.24% from 2.28% but had given back half of those gains by 0600 ET as calm returned.
The only sign of a sustained ‘geopolitical risk’ movement was in crude oil futures, which are now up over $1 a barrel since the attacks. But even that move is barely more than a correction after two weeks of aggressive selling on concerns about oversupply. Crude prices are still close to their post-crisis low at $41.50 a barrel.
Markets often react badly to high-profile outrages but are rarely directly affected by them for any length of time, as economic fundamentals and the weight of everyday investment flows generally reassert themselves.
In this case, markets have found support from the expectation that the European Central Bank will expand its program of quantitative easing next month in response to the slowdown in the Eurozone economy over the summer. There’s also renewed hope for central bank stimulus from the Bank of Japan Monday after the world’s second-biggest economy said it had fallen back into recession for the fourth time in five years.
“The talk is now not of whether the ECB will add to its asset purchases, but by how much,” said Sanjiv Shah, chief investment officer with Sun Global Investments in London. Shah said he expected the Bank of Japan will also come under pressure from the government to do more to support the economy in the light of Monday’s data.
Markets also appear to be taking heart from a robust response by European authorities to the attacks. French Interior Minister Bernard Cazeneuve said law enforcement officers carried out 168 raids across the country, making 23 arrests and seizing 30 weapons, including Kalashnikov automatic rifles and rocket-propelled grenade launchers.
Prime minister Manuel Valls warned that France will close mosques and radical associations “which attack the values of the republic,” while U.K. Prime Minister David Cameron said Britain will boost its intelligence staff by 15% and more than double spending on aviation security. Cameron said the U.K.’s intelligence services had stopped “something like seven attacks in the last six months.”
The BBC also reported that Belgian police had launched fresh raids in the Brussels district of Molenbeek, home to a number of those reportedly involved in planning the attacks. They include Abdelhamid Abaaoud, whom law enforcement sources identified as masterminding the attack, according to the French newspaper Libération.
The attacks have added a whole new dimension to the ongoing war between Islamic State and much of the rest of the world, marking its determination and ability to spread the conflict beyond its power base in Syria and Iraq.
But the relative degree of calm in the markets may also owe something to the sense that IS is in fact under increasing pressure. Last week, a U.S. drone strike appeared to have killed the notorious “Jihadi John” and other senior fighters, while Kurdish militia fighters inflicted a significant strategic defeat on it by retaking the area around Mount Sinjar in northern Iraq, effectively cutting the area under its control in two and raising hopes that it can be conclusively defeated in Iraq.
