Trader Talk

Why the market reaction to the Paris attack have been muted

A trader works on the floor of the New York Stock Exchange.
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It's been a surprisingly quiet trading day. After opening down 1 percent, all the European bourses recovered, with most ending in positive territory.

U.S. stocks were split at the open, with defensive names like utilities and telecom and consumer staples leading, but as oil rallied mid-morning the entire market lifted, with energy stocks taking the lead.

The CBOE Volatility Index is experiencing one of its biggest declines in a month, down about 9 percent.

I've been asked repeatedly why the markets were so quiet in light of the attack. There are several likely reasons the market did not go into panic mode:

1) Stocks were very oversold. Global markets had a terrible week, with much of Europe and the U.S. down about 3 percent, with particularly large declines in energy and retail stocks.

This morning, when the European markets opened down 1 percent but then immediately began recovering, it likely forced some participants who were short going into the weekend to cover their positions.

2) The economic impact of terrorist attacks is more muted than many expect. Prior attacks indicate that consumption is usually "postponed" rather than abandoned, so the long-term economic impact has been small.

3) The ECB is likely to be even more accommodative. Indeed, the day before the Paris attacks, ECB head Mario Draghi hinted that he may continue to buy bonds beyond autumn of 2016, when the current $1.1 trillion euro QE program is slated to end. He also said he could up the number of bond purchases per month and expand the list of bonds the ECB could buy.

4) The final possible contributor to today's muted market reaction makes me uncomfortable to even acknowledge, but it is on the minds of a good part of the trading community today: as the frequency of terrorist attacks has increased, the emotional impact is diminishing as well. We are just getting inured to these events. Look how fast even Paris is trying to get back to normal, re-opening the Eiffel Tower.

Regardless: a good argument could be made that this event is different. This is not a one-off event, this is the third event in a short period of time (following on the downing of the Russian airliner in Egypt, and the bombing of Hezollah neighborhoods in Lebanon), all claimed by ISIS.