As we have written previously, climate change continues to influence the Australian and global climate. As a result, we as humans have become acclimatised to seeing seasonal weather changes throughout the year, or if you live in Melbourne, in one single day.
The Australian Bureau of Meteorology (BOM) has recently announced that Australia has now officially shifted from La Niña to El Niño with a positive Indian Ocean Dipole (IOD) currently underway. For context, a La Niña climate pattern triggers colder and wetter periods, whereas El Niño can cause hotter and drier conditions.
Research conducted by the BOM states that “when a positive IOD and El Niño occur together, their drying effect is typically stronger and more widespread across Australia.” Historically, weather has rarely had a material impact on markets, however that could be set to change over coming quarters.
The potential for extreme weather conditions driven by El Niño could threaten global supply chains and energy supplies, potentially putting upwards pressure on inflation and the outlook for interest rates.
Source: Charles Schwab, FactSet
The El Niño event in 2015 was one of the strongest on record, and lead to significant weather disruptions, triggering a sell-off in the global stock market, unsurprisingly led lower by the material and energy sectors as shown in the visual below.
Source: Charles Schwab, Bloomberg
While weather events, just as markets, are difficult to predict, investors should consider the potential implications.
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