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Hurricane season in the US - Where to look for trading opportunities

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IG-Andi

Hurricane Michael is already regarded as one of the strongest hurricanes ever to hit US. The worst hit areas of Florida’s northwest coast saw significant damage to residential property, along with President Trump authorizing FEMA to step in and coordinate disaster efforts. 

Even though the worst might have already passed, the 2018 North Atlantic hurricane season is likely to have sizable effect for the next seven weeks. The effect on the markets can be notable around this time, with the following sectors likely to see an increase in volatility.

  • The energy sector is likely to be heavily impacted. Since oil in the US is mostly extracted in northern regions and refined in the areas around the Gulf of Mexico, oil’s supply chain could be disrupted. If refineries were to be impacted, the demand for crude could crumble, putting downward pressure on prices. Furthermore, any disturbance on the US oil export levels could positively impact petroleum-derived commodities’ prices as seen most notably with Hurricane Harvey in 2017 which saw Nymex RBOB contracts rise over 9% in three days. When we look at the local oil climate, it should probably be noted that the U.S. Energy Information Administration (EIA) reported rises in both crude oil and gasoline inventories.
  • When it comes to soft commodities, cotton could be a major concern until the end of November. Carolina and Georgia produce around 20% of US cotton and only about 10% has been harvested. To add to the global landscape, India’s production of cotton could fall as much as 45% due to weather and income issues. Whilst the cotton markets are roughly flat from where they were at the start of the year, could bullish news and a lack of supply cause upside mobility for this market?
  • Orange juice could experience even more volatility due to supply concerns in Florida. West in Mississippi delta, sugar fell 20% off mostly due to higher Real, but has been recovering since the 28th of September. Moreover, the sustainability of the bullish trend could begin to arise. You can find all this under the soft commodity section on the IG trading platform.
  • On the stock markets, the Insurance and Reinsurance sectors are to be closely watched. As of mid-September, $36.6 billion in catastrophe bonds (CAT Bonds) were outstanding, $11.9 billion of which was issued this year, according to data collected by Artemis. The bonds, issued by insurance companies to mitigate their exposure to natural disasters such as hurricanes or earthquakes, pay a coupon to investors as long as a trigger event does not occur. Nevertheless, analysts at Keefe, Bruyette & Woods said that while hurricane Michael could have only modestly pressured the share prices of exposed Property & Casualty insurers and reinsurers, which was seen on Wednesday as equity indices tracking the sector and Bermudian reinsurance firm share prices fell, it won’t be a particularly major event for the market. Furthermore, wind and storm surge related insurance industry loss from hurricane Michael is estimated to be between $2 billion and $4.5 billion by Corelogic.
  • Insurance-Linked Securities (ILS) funds, who provide financial instruments whose values are driven by insurance loss events, are also to be monitored. Such funds compete with traditional Insurance businesses and are therefore impacted by the very same external events.
  • Last year, Atlanta-based Cox Automotive Inc. estimated that up to 500,000 vehicles were damaged by Hurricane Harvey and the floodwater that devastated Houston. Similar figures this year could prop up car sales in the region by relevant amounts. 
     
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