World Economy

Paris attacks to weigh on already-frail market sentiment

Candles, flowers and a leaflet with the slogan "I am Paris" are left in tribute to victims of Paris attacks in central Strasbourg, France, November 14, 2015.
Vincent Kessler | Reuters

Asian markets will start the week digesting the deadly terror attacks that struck France on Friday, with regional stocks expected to take a hit.

According to analysts, investors are likely to seek out safe havens in the wake of the attacks which killed at least 129 people.

"The horrific events in Paris on Friday are likely to have a short sharp effect in markets but in the long-term, real effects are more likely to influence political risk than the markets themselves," IG's market strategist Evan Lucas wrote in a note released early Monday.

"Since the Twin Towers attacks, there have been four major attacks around the world. The initial reaction in all jurisdictions were short, sharp sell-offs, but within ten days of the events, the markets or local currency returned to the level of before the events. I would expect the same reaction for the Paris events," the Melbourne-based strategist added.

In Paris, financial markets will open as normal on Monday, the stock exchange operator Euronext said on Saturday.

Read MoreStocks see new wall of worry

Mohamed El-Erian, chief economic adviser at Allianz, told Reuters: "With the horrible tragedy leading to some short-term restraint to French gross domestic product (GDP), equity markets are likely to open lower with both government yields and the euro falling."

Outside France, few expect a jolt as significant as the hiatus after 2001's attacks that destroyed the World Trade Centre in New York City.

In early foreign exchange markets trading, the euro was slightly lower against the dollar and yen. Markets in the Middle East, which trade on Sunday, were hit hard, though part of that decline was due to recent falls in oil prices.

Analysts trying to put the event in some historical context say prior events like this in Europe over the past 15 years tended not to have any durable market or economic effects.

"As horrific as these events are – and this is truly awful – economic activity does tend to be pretty resilient," said Howard Archer, chief U.K. and European economist at IHS Global Insight.

He noted that the UK, Spain and France have all seen their economies "little damaged by terrorist atrocities in the past."

An employee oversees the drying of Japanese national flags at Tokyo Seiki's manufacturing facility in Numata, Gunma Prefecture, Japan.
Kiyoshi Ota | Bloomberg via Getty Images

In Asia, the other focus for markets will be Japan.

Japan's economy shrank an annualized 0.8 percent in the July-September period, official data showed early Monday, worse than the expected 0.2 percent contraction and following a 1.2 percent contraction in the preceding quarter due to a drop in capital spending and weakening external demand across Asia, in particular China.

This puts Asia's second-largest economy in a technical recession, usually defined as two consecutive quarters of economic contraction.

"The good news was private consumption was fairly solid, but what's worrying going forward is the strength of capex. It has been weakening for the past couple of months on the back of slower trade and I think that's the number that the Bank of Japan will be worried going forward," Izumi Devalier, Japan Economist at HSBC, told CNBC Asia's "Squawk Box" on Monday.

Meanwhile, October trade figures due Thursday will likely continue to paint a disappointing picture for exports amid a slower growth in China, one of Japan's major trading partners.

"Japan's trade deficit likely narrowed to 80 trillion yen in October, as falling imports outpace the drop in exports. Low global commodity prices and lackluster domestic demand are behind the ongoing decline in imports, and this is likely to continue in the near future. Weak Chinese demand is dampening export growth in the region, and this is dragging on Japanese exports as the effects of the weak yen fade," Moody's Analytics said in a report released on November 13.

Despite sputtering growth and persistently low inflation, Bank of Japan (BOJ) Governor Haruhiko Kuroda has repeatedly downplayed the need for fresh policy stimulus, reiterating his optimism that a consumption-driven recovery will eventually take hold. As such, analysts believe that the central bank will likely maintain its massive stimulus program at Thursday's policy meeting.

"We don't think the BOJ is going to move. We don't think further stimulus is in the pipeline for now and the GDP print doesn't change the picture," HSBC's Devalier said.

"Our stance is that the BOJ and the government are comfortable with where the yen is. Unless there's a significant deflationary shock in the form of a very strong currency or a significant decline in equities, their inclination is to hold. Instead we think it's the government [who will be doing the] heavy lifting; we expect the government to formalize another round of fiscal stimulus package after this GDP report," she added.

Read MoreMore easing won't solve Europe, Japan's problems: Weber

Elsewhere in Asia

Thailand is also on GDP-watch on Monday. According to economists polled by Reuters, Southeast Asia's second-biggest economy is estimated to grow 1.65 percent in the third quarter on a seasonally-adjusted basis, up from 0.36 percent in the April-June period.

On an annual basis, growth is expected to come in at 2.6 percent, lower than the second quarter's 2.8 percent.

"The contraction in year-to-date industrial production growth widened to 4.4 percent in September. We think the draught and the Bangkok bombing in August dented agriculture and services growth respectively. However, public spending, which helped raise growth to 2.9 percent in [the first half of 2015], remained in play," Tim Condon, head of research for Asia at ING Financial Markets, wrote in a note on Friday.

Monday also brings India's wholesale prices, which are expected to chalk up their 12th straight month of declines in October amid stubborn weakness in global oil prices. The wholesale price index (WPI) likely fell 3.7 percent in October from a year earlier, according to Moody's Analytics, compared with a drop of 4.54 percent in the preceding month.

Meanwhile, recent comments from Bank Indonesia (BI) Governor Agus Martowardojo suggest that the central bank is unlikely to cut interest rates when it convenes its monthly policy meeting on Tuesday.

BI will continue to focus on stability over growth policy and a rate cut in the near term was unlikely, Governor Martowardojo told Indonesia's largest English broadsheet, The Jakarta Post, on November 10.

Indonesia's central bank has kept its benchmark interest rate on hold at 7.5 percent since February, despite heightening calls for a rate cut to promote economic growth. The country's chief economic minister said earlier this month that BI had room to cut interest rates after inflation eased to 6.25 percent in October.

Lastly, China's nationwide house price index for October will be released on Wednesday at 9.30am local time.

— Reuters contributed to this report