What forces will emerge in markets in wake of Paris tragedy - Analysis

The tragedy occurred in Paris on Friday left a number of political and economic implications, aside from the tighter security and elevated alertness.

First of all, the attack offset other issues at the G20 meeting which is held in Belek, Turkey.

Downward pressure will be imposed on equity prices overall, with consumer-sensitive sectors hit particularly hard, with the euro lower, says Mohamed El-Erian. Government bond yields will decline as the impact of higher borrowing levels on spreads is eclipsed by the impact of lower growth and additional stimulus from the European Central Bank, he adds.

Analyst Marc Chandler says in his blog that:

1) On one hand facing terror, investors often reduce risk.

2) Officials often provide reassurances that they have the will and means to address any liquidity needs, he adds.

The attack on France may have serious repercussions on the refugee debate that has already revealed centrifugal forces pulling Europe apart as much if not more than the creditor-debtor dispute that focused on Greece earlier this year.

In terms of more local political issues, it may serve as a possibility for a political reset for French President Francois Hollande, whose support has been dampened by the poor economic performance.

In Germany, Merkel has taken a bold and controversial stance, and her critics are likely to use the Paris attack to put her under more pressure.

Mohamed El-Erian, the former Pimco co-CEO who is currently the chief economic adviser to Allianz and chair of President Barack Obama’s Global Development Council, also gives an analysis in an article for the Financial Times.

He says that markets will possibly impose downward pressure on equity prices overall, with consumer-sensitive sectors blown particularly hard, and driving the euro lower. Government bond yields are likely to decline as the impact of higher borrowing levels on spreads is eclipsed by the joint impact of lower growth and additional stimulus from the European Central Bank.

While noticeable in the short term, over time these effects would likely prove both temporary and reversible — with one important qualification, El-Erian notes.

"The negative economic and financial aftermath of the terrorist attacks comes at a time when Europe is already dealing with a number of difficult challenges – from the legacy of years of inadequate growth and high unemployment to the influx of refugees. As such, there is a need to assess the risk of tipping points where, in a negative feedback loop, the overall impact can far exceed the sum of the contributing parts."

In terms of policies, the ECB is now expected to be even more eager to widen its monetary policy support for the economy, including the extension of its quantitative easing program.

However, the real onus here is on other policy-making bodies, El-Erian says. They have much better means to deal with Europe’s economic malaise, and the incremental damage that Friday’s attacks could cause.