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CME Group Economist: El Nino will make markets more volatile

Credit: Wikipedia Commons

by Ben Nuelle

El Nino is beginning to take effect. Will a strong El Nino make the markets more volatile?
CME Group Senior Economist Erik Norland recently completed a report focusing on El Nino and how it affects the markets.

“It turns out volatility tends to correlate positively with the strength of an El Nino. We think it is possible in the next few months maybe even probable we could see more volatility in corn, soybeans, and wheat. In addition to that, another aspect of the report is that when you have a very strong El Nino it can move into a very strong La Nina,” Norland said.

He said this can happen in as early as 12 months.

“What matters about that is that La Nina tends to have exceptionally high levels of volatility in agricultural goods markets. So recently, in response to fairly tame volatility options prices in corn wheat and soy have been fairly low. We think there is a risk though given the strength of the El Nino and given the possibility that it might move back into a La Nina, we could see much more volatile markets ahead, Norland said.

Norland said what the El Nino does over the winter does not matter all that much.

“It’s not really yet the planting season or the growing season and harvest has already happened. What will be key is next spring. Is there enough rain in the Midwest for example? Does the El Nino produce some drought conditions? So it is really around February and March next year we should look very closely at precipitation,” Norland said.

El Ninos typically peak between the months of November through January. He says it is very unusual for the El Nino to linger for more than six months.

Read Norland’s report here.

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