Paris terror: The potential aftermath for markets

The Euronext flag hangs outside the NYSE.
Adam Jeffery | CNBC
The Euronext flag hangs outside the NYSE.

Friday's tragic events in Paris are set to have repercussions all over the world, and financial markets are no exception.

As the dust settles from the attacks which left 129 people dead and hundreds more injured, analysts began to ponder the geopolitical and economic implications.

Euronext, France's main securities market, said in a statement that business will proceed as usual—albeit with added precautions. "Markets will open as normal at Euronext on Monday," the exchange said in a statement. "Our priority is the safety of our staff and there will therefore be extra security in place in Paris on Monday‎."

Marc Chandler, head of FX strategy at Brown Brothers Harriman, said that investors' initial reaction would be to cut exposure to higher-yielding, risky assets.

"On one hand it pushes the market in a direction it was already moving in – to reduce risk. On the other hand, central banks don't let these sorts of things affect markets, and they could say they'll do whatever it takes to provide liquidity," he told CNBC.

Chandler added that the Paris attacks should push markets in a direction they were already going, with the dollar firming, bond prices rising, stocks falling and oil also falling.

"I think there might be a quick knee jerk response. I could see people trying to reduce risk. That means both longs and shorts have to get out. Bonds ended firmer Friday and stocks were selling off," he said.


The possible fallout for financial markets when they open trading again may reverberate across the following asset markets:

Oil

A consensus is forming that Western countries are more likely to involve themselves in the war against Islamic State. With the stakes raised, the already combustible Middle East may see further destabilization and drive the price of oil higher.

After an initial sell-off, the attacks of September 11, 2001 led to a 55 percent rally in the price of Brent crude over 12 months, a surge that began in November 2001. At the time, the U.S. began its war in Afghanistan and rumblings of a confrontation with Iraq was already building.

Volatility

Both European and Middle Eastern stock markets are expected to see increased volatility as a result of Friday night's events, with geopolitical woes expected to strain relationships between some countries.

"The attacks raise uncertainty, lower confidence and are growth negative through border closures and emergency measures," Richard Cochinos, head of G10 currency strategy at Citi, wrote in a research note Sunday.

Gold

In times of increased risk, gold is the classic safe haven. It has also had a month where it has sustained losses every week, as investors expected a Fed rate rise in December. More uncertainty may boost the allure of bullion.

Euro

The single currency may be facing increased headwinds as a result of the weekend's events – but Citi strategists argue that further action by the European Central Bank is more likely as a result.

"The justification for the euro shorts was established on ECB expectations and any additional policy driving capital outflows," Cochinos said, speaking of investor bets that the single currency would fall. "This attack, while terrible, does not shift those criteria meaningfully," he added.

--CNBC's Patti Domm contributed to this report.