El Niño has been increasingly in the news this summer. This warming cycle in the eastern Pacific Ocean is widely expected to be the biggest of this century and perhaps the biggest in decades dating back to the 1950s. The impact of El Niño on weather patterns around the world (particularly California) is well known. While most focus in the news is on temperatures and storms, changes in weather can have a significant impact on demand for energy this winter and also on crop conditions through the northern harvest season and into next year. Because of this, El Niño may also have a significant impact on stocks and commodities. Looking at returns for stocks and commodities in El Niño years over the last three decades (from 1986), it is clear not only that El Niño can have a significant impact on market prices but that the impact can vary dramatically from season to season. The series of tables below highlights the performance of major indices and commodities during El Niño years. Returns are based on whether September was an El Niño month and the results for the previous three summer months are compared with the following three fall months. Overall, the results show that El Niño summers have tended to be very weak for many indices and commodities with 10% plus declines common. As an El Niño summer, the big volatility and selloffs of the last three month’s don’t appear so surprising. The results also show, however, that the negative effects of El Niño tend to hit the hardest in the summer and that autumn often sees significant rebounds for many stocks and commodities. This suggests that the summer of discontent could fade into an autumn of recovery for many major markets. This summer, we saw a major selloff in August but over the last 3-4 weeks, many markets have rebounded off their lows. We aren’t out of the seasonally weakest time of the year though, and another downdraft remains possible. Since I used a September 15th cut-off date rather than quarter-end, I have compared the average for El Niño years with both the performance to date and the summer 2015 low. Returns when September is an El Nino Month Source: CMC Markets 15.09.15 Major indices around the world have historically sold off during El Niño summers, falling in the 15-20% range for the most part. Even through what seemed like big bumps in August, declines were less than average for El Niño summers. The data also shows that El Niño Octobers and even into November may remain rough but also that stock markets have historically rebounded from December onward in El Niño years.

Source: CMC Markets 15.09.15 With the exception of Natural Gas, El Niño years have historically been difficult for energy commodities and metals. Summer declines have historically extended through the autumn leaving markets unable to bounce back until the next calendar year. This year, both crude and heating oil have fallen a lot more than average, opening the potential for an autumn rebound back toward the average particularly for heating oil as winter approaches. Gold has historically dropped in El Niño summers then rebounded in El Niño autumns. This year, gold did not fall as much as the historical average so it may not rebound as much either, but it does seem to have the potential for more base building at least. Natural Gas has been a bit different than the others. Historically Natural Gas has soared in El Niño summers and the rally has continued into the autumn, petering out by December. This year, Natural Gas has dropped rather than rallied so far. It’s possible that in the past summer El Niño rallies were caused by hurricane activity curtailing production in the Gulf of Mexico. This year’s hurricane season has been light so far, which could explain the lack of a rally. We could still see a seasonal advance in Natural Gas this fall ahead of heating season. Natural Gas and Heating oil traders should note that El Niño has been known to push warmer temperatures into eastern consuming regions. Because of this, the seasonal pre-winter bounce could be smaller and shorter than usual.

Source: CMC Markets 15.09.15 Historically, El Niño has depressed grain prices in the summers but that declines have then set the stage for big rebounds through the fall and onward well through the following year. This year, wheat has done a lot worse than the El Niño summer average and rough rice has performed a lot better. Heading into the fall, rice may not have as much room to gain, while wheat has the potential for a significant catch-up move in addition to the common El Niño autumn rebound.

Source: CMC Markets 15.09.15 Soft commodities in the past have had some of the biggest seasonal reversals between summer and fall in El Niño years. In particular, check out Orange juice which fell 15.7% on average in El Niño summers then gained 13.1% on average in El Niño autumns. Sugar and cotton have also historically posted strong turnaround. So far this year, Orange Juice did not fall as much as usual and has already bounced back strongly so it may not have as much upside as previous El Niño years. Sugar has staged a moderate rebound with room to rally. Cotton and Arabica coffee remain relatively close to their lows, indicating significant turnaround potential. Conclusion El Niño years have historically been volatile for both stocks and commodities with significant reversals in performance between the summer and fall seasons. This summer’s declines have not been unusual in the context of being an El Niño year potentially setting the stage for significant rebound rallies in stocks and commodities this autumn. Email: marketcomment@cmcmarkets.com Follow CMC Markets on Twitter: @cmcmarkets Follow Colin Cieszynski (Chief Market Strategist) on Twitter: @CCieszynski_CMC Note that any references to CFD prices or price changes are sourced from CMC Markets' proprietary trading system Marketmaker™. Copyright 2015, CMC Markets. All rights reserved. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.