Markets bask in bullishness as record heat scorches harvests

Capital markets have barely reacted to the unprecedented heatwaves sweeping Europe and north America, even though they give a foretaste of much worse disruption to come.

The markets’ seeming insouciance is partly down to investors struggling to know how to price climate risk, specialists say — but also reflects a wider indifference or lack of understanding in society.

The S&P 500 and Euro Stoxx 50 indices both hit record highs on Thursday as tech stocks edged up, while the temperature in London reached 38°C, its highest this year, and tourists were forced to flee in dinghies from a wildfire in Greece.

US and German 10 year bond yields are at or near year-to-date highs, but they are being driven more by news about the US-Iran war than the climate. Germany’s yield contracted about 25bp during some of the hot weather in late May and June.

Credit spreads have been remarkably stable, with the S&P iTraxx Main and Crossover indices of credit default swaps barely flinching as drought and fires besieged Europe.

Investment banks have been scouring markets, company statements and scientific data to understand the risks.

In a series of research reports, Morgan Stanley has charted the extreme weather conditions, noting that across June and July average temperatures in western Europe were 2.8°C above historical averages.

Rainfall in northwestern Europe was below any level in the past 10 years, as was the level of water in the Rhine and Danube.

By August 12, wildfires had burned 556,000 hectares in the EU, meaning this year could easily still exceed last, which was the worst on record.

But researchers have not found many impacts on securities prices, nor are they warning of them.

Investors are aware of the heatwaves and fires, but are not changing their allocations in response.

A notable result of drought in 2018 was economic disruption in Germany caused by the Rhine becoming so dry it could not be used for navigation.

Around 10% of German goods are transported along internal waterways, mainly the Rhine, but for some products, such as coal, oil, gas, petrol, chemicals and metals, it is 20% to 30%, Morgan Stanley said.

Eight years ago drought pushed German energy prices up by 4% and production down 10% to 15% in chemicals, pharmaceuticals and mining. Morgan Stanley found prices recovered quite quickly, but production stayed low for months.

A rating agency analyst said this was estimated to have cost the German economy 0.4 percentage points of growth in 2018.

The standard gauge for Rhine depth at Kaub is now just 15cm, far below the previous record of 25cm in 2018 and the 78cm adequate for shipping.

But this year, companies are benefiting from having prepared. Chemicals group BASF’s CEO told investors in late July that the drought would cause “disruption in value chains in Europe,” but “we are in a much better prepared position than... in 2018”, Morgan Stanley highlighted.

The company is using special barges that can operate at low water levels and has shifted some transport to the land.

A few days later, competitor Evonik’s CEO said “there will be a tiny impact” from the dry Rhine. Both companies’ share prices have risen since mid-June.

This illustrates that effects may not occur where investors expect.

Though France has been hit by terrible wildfires, share prices of the largest listed insurance groups active in France — Crédit Agricole, Axa, Generali and Scor — are all up between 9% and 23% this year. Even Mapfre in Spain, with even worse fires, is up 3%.

But Vinci’s CEO noted “a cyclical weakness of traffic” on its French toll motorways, caused partly by the fuel price shock in March, as well as “the negative effect of several exceptional heatwaves”.

And cement group Cemex said its sales had been impacted by “the severe heatwave through much of Europe, which resulted in restrictions on work at construction sites in many markets.”

The electricity sector is another less obvious victim. Hydroelectric power output has fallen in many countries. Romania this week closed its only nuclear power station, which produces about 20% of its electricity, for at least 10 days, because water in the Danube it uses for cooling was too low.

Hungary is struggling to keep its Paks reactor going at 25% of capacity. In France, said Bank of America Global Research, river water has sometimes been too warm to cool reactors.

Climate risk is two-faced: it can strike unexpectedly in specific places, but its effects can also be diffuse — spread out in time and space.

“Climate change in some aspects is a very long term, gradual event,” said Aline Schuiling, senior economist in sustainability research at ABN Amro in Amsterdam, “but in the mean time you already see a lot of climate-driven events and incidents. People don’t know how to price it.”

Baffled, investors look the other way. “Other macroeconomic factors — the [war in the] Gulf, a good set of results in tech — are driving equity and corporate bond markets much more than [the extreme weather] we’re seeing day to day play out in Europe,” said Tom Tayler, director of policy and finance at Earth Capital Nexus, a research centre at the London School of Economics.

For one thing, he said, “these things are going to be on a time lag. A typhoon in China hits production of certain products, and you get productivity hits from weather in the UK and western Europe that we’re starting to see modelled, but they won’t show up in the growth numbers for a quarter or so”.

Risk oozing out through time and across the economy makes it harder to detect its effects.

“The headlines are always a bit screamy, about record temperatures,” said Schuiling, “but the question is what does that mean for inflation and GDP growth?”

That is not easy to answer — especially with other turbulent events like the Middle East war disrupting supply chains and provoking inflation.

ABN Amro is preparing to publish its forecast of the heatwaves’ impact. It could be about a 0.1% to 0.2% impact on European GDP growth for 2026 as a whole, though worse for the third quarter and for the most severely hit countries like France and Germany.

“A lot of climate records have been broken like drought and heat, particularly in France and Spain,” said Schuiling. “You can already guess that the impact on the economy will be worse than last year.”

Morgan Stanley has not found a reason to change its German growth forecast, but is predicting that food prices will rise enough to drive up total inflation in the euro area 15bp by December this year, and 30bp next spring.

Triodos Bank, the Dutch environmentally conscious lender, gave a starker warning last week that the heat would carve 1% off EU GDP this year.

One organisation that has tried to look through the economic murk and systematically plot how big climate losses are likely to be, and which industries they will hit, is MSCI, the indices and analytics company.

In a study published in September 2025 of 9,350 public companies it studies, it predicted that globally, there would be $1.3tr of asset damage and lost revenues due to climate change in just the next year.

Of that, $180bn would come from acute events, mainly floods and cyclones, with a little from wildfires. Fully $1.1tr would come from chronic hazards — above all, with $600bn, extreme heat.

If climate change is not causing individual stocks to tumble or whole markets to crash, many would see that as a good thing. Investors are responding rationally to a situation in which their returns are not under immediate threat.

But investments could be in danger in the medium and long terms. Markets are supposed to be forward-looking and send signals about which kinds of investment need to be encouraged and which should be avoided.

Yet the overwhelming momentum in capital markets since 2022 has been an investment boom in artificial intelligence, including the data centres that power it.

This runs directly counter to climate scientists’ urgent calls for humans to reduce energy consumption wherever possible and seek efficiency.

“A single query on ChatGPT3 uses roughly 10 times more energy than a typical Google search,” wrote the European Central Bank last year.

The International Energy Agency estimated total data centre energy demand at 415 TWh in 2024, about 1.5% of global electricity consumption. It had grown 12% a year for five years.

That consumption will nearly triple to around 1,200 TWh by 2035 in the IEA’s base case, and reach almost 1,750 TWh in its ‘Lift-Off’ scenario.

Capital markets are running to finance this growth, which has become one of the most salient themes in Europe’s corporate bond and loan markets this year.

The doublethink that enables investors and banks to acknowledge the reality of climate change while financing technologies that make it worse mirrors the way society as a whole is reacting.

Asked whether he had noticed this summer’s extreme weather changing attitudes towards climate change in the political and business world, Bob Ward, policy and communications director at the Grantham Research Institute on Climate Change and the Environment, said: “I don’t really see that people are paying more attention. People haven’t realised this is a trend... [though] the UK’s previous warmest summer was last summer. Signs are politically that countries have just become distracted by other things.”

After their most recent summit in June, G7 leaders’ collective statements included no mention of climate change, the energy transition or climate adaptation, even though the host was climate-friendly France, to avoid upsetting US president Donald Trump.

Financial markets, too, “haven’t understood what this is pointing to, and once they do, there will be a very rapid need for correction”, said Ward. “The difficulty is, if they don’t realise soon enough, there will be very little they can do about it.”

As well as failing to shift investment to greener technologies, markets are ignoring the fact that global warming is going to get much worse.

“The impacts of climate change will continue to increase whilst concentrations of carbon dioxide in the atmosphere increase, until the world reaches net zero emissions of CO_2,” said Ward at the Grantham Institute, which is based at the London School of Economics. “So impacts will worsen for at least the next 25 years, given that we are now unlikely to prevent temperatures from rising by more than 1.5°C above pre-industrial levels. We are going to enter territory where things are a lot worse than we had planned, so this will seem mild in a few years’ time, compared with what we’re going to face.”

Two of the most important threats will be fire and food shortages.

“Something that looms very large on my radar is the threat of wildfires,” said David Shukman, former BBC science editor and author of The Response, a book about the UK’s preparedness for climate change. “The country is a long way from being ready for those. We saw enormous implications for tourism and industry recently with wildfires advancing towards Bordeaux, threatening really important military and industrial sites.”

Shukman said there had been a similar incident in the UK in 2011, with a fire at West Swinley which was heading towards the Broadmoor maximum security mental hospital, Sandhurst military academy and a fuel pipeline that runs from the Fawley refinery to Heathrow airport.

“The fire brigade rang up Broadmoor and said ‘you’ve got to dust off your evacuation plan’,” said Shukman. “They said ‘we don’t have one — we are a high security facility’.”

Insurance companies have already walked away from providing home insurance in parts of California, and Shukman believes this could happen in the UK, as it has already for flood risk.

“The Ordnance Survey did some highly detailed mapping of properties in England to see how many houses are within 100 metres of land that could catch fire,” Shukman said. “They came up with 1.8m. Even if you think that number has too many zeroes in it, you are dealing with big numbers.”

The latest forecast from Coceral, the European cereals industry trade body, is that grain production in the EU plus UK will fall 7.5% this year, after hot, dry weather hit crops in the early summer when kernels should have been filling.

Schuiling at ABN Amro said this would cost the EU economy about €5bn-€6bn directly.

The poor harvest will inevitably raise grain prices on world markets. If other growing regions produce decent crops, the pain will be felt mainly in the poorest grain-importing countries.

It is quite clear that a more severe fall in yields — say 20% — could lead to hardship in Europe, too.

“The impact of droughts on agriculture depends a lot on how long they last,” said the rating agency analyst. “The longer it goes on, the harder it gets for plants and soils to recover, making it harder for yields to recover. Not only this year’s harvest gets impacted, but also next year’s.”

In the north of France, “the current drought conditions are making it impossible for farmers to sow seeds for the next harvest because the soil is not just too dry for seeds to germinate, but also too hard for machines to plough the land. This means plants won’t get as much time to grow as they usually do until the next harvest.”

Because the food system is global, with most countries importing substantial shares of what they eat, climate impacts in one place can hurt people and economies in another.

A famous example is the droughts of 2010, which reduced wheat production in Russia by 33%, Kazakhstan by 43% and Canada 14%.

“That resulted in Russia temporarily stopping all exports, which caused a huge spike in global prices of wheat,” said Ward. Months later in early 2011, “The price of bread was a factor in the start of the Arab Spring. These kinds of impacts can push us over the edge.”

One reason markets are not pricing in a climate disaster may be a complacency embedded in their own habits of thought.

“There is an assumption,” Tayler said, “driven by fiscal stimulus in response to the financial crisis and Covid, that governments will bail markets out. But that doesn’t mean risk goes away, it means it lands on sovereign balance sheets — which means either equity prices are wrong or sovereign bond prices are. You can’t have it both ways.”

But the climate is quite unlike earlier crises. Feedback loops are starting. Warming oceans and tundra are releasing carbon stored for centuries into the atmosphere. Wildfires turn trees into carbon dioxide, destroy plants’ ability to sequester carbon, and speed up global warming, in turn making wildfires more likely.

“Unlike 2008 and Covid, which were severe but discrete shocks, we are going to see cascading impacts,” Tayler said. “I don’t think any government has the fiscal space to repeatedly bail out markets.”

In 2008, he recalled, when Lehman Brothers fell “markets suddenly went 'oh my goodness, the government isn’t going to bail us out'”.

To restore stability, the US had to legislate the Troubled Asset Relief Program for the Treasury to buy up to $700bn of bad investments from banks. But governments cannot keep doing that year after year.

How would markets react, Tayler asked, when “suddenly governments don’t become the provider of liquidity or buyer of corporate debt of last resort? What if there are multiple sovereign debt issues, with countries either going to the IMF or seeking to restructure debt?”

One of the ironies, he pointed out, is that developed countries with the deepest markets would have to find the most money for stimulus.

“It could be a developed market which doesn’t think it can find fiscal headroom to intervene. You’ve got a situation where nobody in the market has prepared for this.”