There are many different factors that could affect markets. On top of the obvious ones – supply and demand, interest rate decisions and economic data – there is a far less obvious one: The weather. Yes, it’s true, traders worldwide will often closely track weather forecasts in an effort to better identify storms, droughts and other acts of nature that impact the price of various instruments. In the following article, we’ll visit some of those weather conditions in an effort to better understand how it affects market sentiment.
When a major drought hit Brazil’s Espirito Santo Region back in 2014, it sent coffee futures up 4.5%. That’s because a drought means less water and less water means less coffee will be able to grow. If less coffee is able to grow, the supply drops and if the supply drops, the price usually rises. That is one classic example of how extreme weather conditions can affect the price of an asset. It’s not only droughts either. Hurricanes, tornadoes and other unexpected natural disasters can have a similar effect.
Coffee isn’t the only commodity impacted by extreme weather conditions of course. Practically any of the agriculture commodity – corn, soy, sugar, wheat, cotton – is affected by rainfalls. However, it’s not only commodities that are affected.
A 2014 IHS Global Insight study found that a single-day shutdown in New York can translate into $700M in gross economic costs. This also includes $152M in lost retail sales. This means that a storm can be great for sales but it can also be horrible for sales. That’s because when people get word of a hurricane or any other natural disaster, they will often scramble in an effort to stock up on staples such as bottled water, kerosene and canned foods. These types of mad dashes can be great for the companies that are manufacturing those goods as consumers will often buy at an abnormal rate while purchasing more than they need. On the flip side, people will usually opt to stay home and not go to retail stores, especially if the weather is responsible for dangerous driving conditions on the road.
In a recent survey from Fluent, 16% of consumers claimed that they have shopped less in the winter of 2015. But the cold weather doesn’t necessarily translate into a boost in online sales. In fact, the Adobe Digital Index data recently reported that the winter storm that hit the Northeast U.S in that same year in January caused a $35 million drop in online sales. Strangely enough, the reason was because people were by-in-large at home and not at work. Apparently, they feel more comfortable making online purchases at work. Adobe analyst Tamara Gaffney explains that “During the workweek, a lot of people really do shop from their work desktop”. Gaffney continues by saying that “you also have power outages and people out shoveling snow. They’re not shopping, they’re doing other things. It has a negative impact on e-commerce.”
Seasons don’t just impact shopping habits of course. They also have the potential of affecting energy consumption, transportation, tourism, the ability of companies to supply their products and many other factors.
Theory vs. fact
If you’re planning to start using the weather channel to help you make trading decision, keep in mind that weather and its potential impact are both fickle and not always easy to pinpoint. In the online shopping industry, companies might choose to use bad weather as an excuse for weaker sales, but it’s hard to say if this is accurate. One recent example is when major beer manufacturers blamed unusual cold weather in the spring of 2013 for big brands like Heineken, Budweiser and Miller Lite for a decrease in sales. Oddly enough, those same companies have seen sales drop for years which means that it could have more to do with increasing popularity of craft beers than the weather.
It’s quite obvious that the weather can potentially affect various commodities and industries, especially if conditions are unusual or extreme. Is it the only factor? Of course not, but by understanding the various factors that can impact the price of a tradable instrument, you can make smarter and more informed trading decisions.
Remember: At iFOREX you can invest in many agricultural commodities as well as in hundreds of shares, indices, currencies and ETFs – all in the form of CFDs. Visit our education center to learn more about the different instruments and the factors that affect them and stay ahead of the market.
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