Wars, natural disasters, political unrest, disease outbreaks, regime change, and trade disputes are some of the many examples of geopolitical events. The effects of today’s globalized, interconnected economic world are no longer felt locally. Indeed, they cascade to other regions and countries far and wide. For example, the world economy is still suffering from the fallouts of the Russia-Ukraine war that started in 2022, while tensions in the Middle East with the Israel-Hamas war present its own set of challenges for the world.
How is it that all these events affect global financial markets?
In this article, we will discuss how geopolitical tensions shape global financial markets and how you can use investing strategies to navigate the volatility arising from global geopolitics successfully.
We hear all the time about geopolitics in the news on mainstream print and electronic media. However, there is a measure for geopolitical risks as well - the Geopolitical Risk Index (GPR). It is calculated by counting the number or frequency of news articles related to unfavorable global geopolitical events or developments, such as wars, conflicts, terrorism, tensions, etc.
A higher GPR value reflects higher current negative geopolitical events and a higher probability of adverse events in the future and vice versa. For example, during the 2022-2024 Russia-Ukraine and Israel-Hamas wars, the index levels spiked above the baseline.
According to the BlackRock Geopolitical Risk Indicator, you can see the spikes during times of unrest:
The year 2024 had plenty of important geopolitical events with global implications. Here are some of the major ones:
The Russia-Ukraine war that started in 2022 continued into 2024 with no signs of truce or ceasefire. Although the NATO alliance had not directly participated in the war, there was a shift in their policy concerning military support to Ukraine. For example, the US, Germany, and several other Western countries increased their military supplies to Ukraine and allowed the use of these weapons to strike Russia within the latter’s territory.
Additionally, Ukraine received a batch of F-16 fighter jets, which could extend the war. In a further escalation of the war, Ukraine launched an incursion in the Kursk region of Russia, which is likely to give another new dimension to the ongoing war.
Both Ukraine and Russia are the world’s top producers and exporters of various metals, minerals, and commodities. With the world already reeling from supply chain disruptions due to the ongoing war, the situation could continue to exacerbate world trade and market turmoil in these industries.
The Israel-Hamas war began in October 2023, with the risk of the conflict spreading to nearby countries like Lebanon and other regions as well. The situation in the Red Sea, particularly bordering Lebanon and Yemen, is also volatile as multiple ships have been targeted over the past few months. This presents significant challenges for trade, adding to obstructions in supply chains that drive inflationary pressures. Ceasefire negotiations failed in 2024, and the war could likely prolong as the warring parties continue with provocations.
The spillover impact of the Israel-Hamas war resulted in Iran’s direct retaliatory attack on Israel in April 2024 after the Israeli bombing of the Iranian embassy in Damascus earlier in the same month. Iran has significant proxies operating in the region, and the most recent event that brought Israel and Iran face to face in direct conflict was the assassination of Hamas leader Ismail Haniyeh in Iran’s capital, Tehran. Iran has vowed retaliatory action against Israel that could have far-reaching consequences for the region and the world. The Middle East situation continues to be on edge and is expected to remain so unless some sort of ceasefire agreement, brokered by the US and other countries, is reached in Gaza between Hamas and Israel.
In 2024, parliamentary elections were held in the UK, France, EU, India, Mexico, Bangladesh, Pakistan, and South Africa, while the US presidential election occurred on November 5th. In France, far-right parties secured considerable seats, although the left-wing alliance managed to secure the majority in the parliament.
In the UK, the Labour Party won the general elections, defeating the Conservative Party led by Rishi Sunak. In the EU, the European People’s Party led by Ursula Von der Leyen secured 186 out of 720 seats and became the single largest party. The anti-EU parties also made gains at the expense of pro-EU parties. Ursula Von der Leyen was re-elected for a second term as President of the European Commission.
In India, general elections for parliament were held in April-June 2024, with the Bharatiya Janata Party (BJP)-led alliance winning the majority of seats. However, this time, Narendra Modi’s party BJP did not manage to get the majority in both houses of parliament, unlike in previous elections. This led to the re-election of Narendra Modi as the Prime Minister of India for the third time.
In South America, the highly contested Venezuelan presidential election named incumbent Maduro as the winner, yet again. This is a hotspot for oil tensions and a significant geopolitical tug-of-war as the Maduro regime allies with Russia and China over the US.
The development and adoption of AI technology are picking up pace, and companies around the world are investing heavily in the technology to harness its potential. At the same time, governments and their regulatory bodies are rushing to draft laws and standards to regulate the use of AI models before rolling them out for general public consumption. Unfortunately, AI could be dangerous if it gets into unscrupulous hands. For example, deep fakes, propaganda, fake news, copyright violations, and other legal issues are some of the concerns governments want to tackle as AI technology grows at an unprecedented pace.
At the Bletchley Park summit in November 2023, a total of 28 countries, including the US, China, and some G-20 countries, reached an agreement known as the Bletchley Declaration. The declaration called for cooperation in managing the challenges and risks emerging from the use of AI and agreed on the use of AI responsibly and safely.
The European Union has also enacted the EU AI Act, which came into force on August 01, 2024. The act serves as a common regulatory and legal framework for the EU and aims to limit the harmful use of AI tools, applications, and models.
The US and China have plenty of contention issues, such as Taiwan, the South-China Sea, the Indo-Pacific security situation, and China-Russia military alliances. Both countries wield significant economic and political power, and tensions between the two countries could mean further unrest in the world. In May 2024, the Biden Administration hiked tariffs on Chinese electric vehicles, steel, aluminum, and solar cells as he called out Chinese manufacturers for enjoying unfair competition against US manufacturers.
With the US presidential elections in November of 2024, the Republican presidential candidate Donald Trump also signaled further hikes on Chinese imports, which could further complicate US-China relations and potentially lead to a trade war.
Financial markets are a reflection of human emotions. Important geopolitical events showcase this by depicting volatility in the markets during times of unrest and uncertainty. Depending on the negativity of a new development, stock markets typically decline in response to negative events that can potentially impact the economy or trade relations. In contrast, the market usually cheers any positive news by moving upward.
Commodity and Forex markets behave in the same way. To understand this, let’s discuss in detail how geopolitical events impact the financial markets, particularly in the backdrop of the geopolitical events in 2024.
Commodity markets can be influenced by the supply and demand shocks related to the commodity being traded. For example, before Russia invaded Ukraine, the WTI and Brent crude oil prices were trading in the range of $90-$95 per barrel. But immediately after the invasion, the prices spiked above $100 per barrel on fears of supply disruptions. In March, one month after the invasion, oil prices soared to a 14-year high of $140 per barrel.
Similarly, gas prices in Europe shot up following the invasion due to disruptions and sanctions on Russian gas. Agricultural commodities like corn, wheat, and sunflower oil saw significant jumps in prices because of the reduction of exports from the two countries to the rest of the world. Supply of industrial metals like palladium and nickel was disturbed leading to shortages and higher prices.
Two years after the start of the war, the world has adjusted its supply chains and consequently, the prices have stabilized. However, geopolitical problems in the Middle East and the possible escalation and intensity of the Russia-Ukraine war could add to volatility and spikes in energy and commodity prices in the future. The China-US trade relations would also be a deciding factor in price trends of various commodities it exports.
Geopolitical events of 2024, such as the ongoing Russia-Ukraine war, the US-China relations and tariffs hike, and Middle East tensions, all had an impact on the forex market in different ways. For example, increased geopolitical tensions and unrest in the Middle East often create disruptions in oil supply and some vital trade routes, resulting in oil price hikes. The Canadian dollar and Russian ruble are the two currencies that are most impacted by gyrations in oil prices because oil makes a sizable portion of their total exports.
Canadian Dollar
Further, volatility and uncertainty in markets often lead to increased demand for the US dollar and Japanese Yen due to their perceived status as safe-haven currencies. After the Russian invasion of Ukraine, the US-led sanctions on Russia pummeled the Russian Ruble against most major currencies. However, the Russian central intervened with capital control measures and interest rate hikes that stabilized the Russian Ruble.
The US presidential elections in November of 2024 could be crucial in determining the future direction of the CNY/USD currency pair, particularly with regard to trade tariffs.
Like commodity and forex markets, stock markets react to geopolitical and other important developments. The reaction could either be broad-based, i.e. it could take the whole index up or down, or it could be limited to particular sectors, industries, or stocks, depending on the nature of the event. The geopolitical situation in the Middle East is important for airlines and other companies that have significant exposure to oil. The condition of the US-China relationship is vital for companies that deal with China for the export and import of raw materials and products.
The AI landscape also holds significance for the stock market as the companies require access to metals and chips to develop and maintain AI models and infrastructure. A conducive regulatory environment will certainly boost the companies’ ability to innovate and develop new AI-related products. Further, the geopolitical situation in emerging markets is important for companies with overseas operations.
Given the nature of geopolitical uncertainty, there are methods to avoid some of the pitfalls of investing in markets during these times. Here are some tips and tricks to help manage your portfolio:
Markets usually tend to overreact to both negative and positive developments. That is the reason why we see corrections in markets as soon as investors’ emotions subside. As you can see in the TradingSim charts above, the same happened in the commodity market with oil and other commodities. Prices of oil, agricultural commodities, and metals spiked initially for some time but later returned to normal. We have seen countless stock market crashes, only to see the markets rebound and scale to new highs. So, if your investing horizon is longer-term, don’t panic. Stay calm even when the market reacts to a geopolitical event; it could be temporary and return to normal at some point.
In addition to a long-term investing perspective, it is also essential to diversify your portfolio, preferably with different asset classes. Some part of your portfolio should be invested in safe-haven assets like the US dollar, Japanese Yen, and Gold, and also in fixed-income securities like government bonds. This will shield your portfolio from wild swings resulting from geopolitical events. You can also consider buying index-based mutual funds or ETFs that will give you exposure to a whole index instead of just a few companies.
Geopolitics are extensively covered in the news and the events are important for global financial markets. As an investor, it is important to stay updated with the news. This way, you can adjust your portfolio beforehand to safeguard your portfolio or even trade the development in your favor. For example, if a geopolitical event that disrupts the oil supply leads to an oil price spike, if you act quickly, you can profit from the market movement.
The geopolitical landscape is constantly evolving, and companies and governments adapt to it by changing their strategies. As a savvy investor, you should be aware of these changes. With the interconnected and globalized world of today, significant events or developments in one region or country can have spillover effects on other countries in terms of economic and trade impact.
Financial markets also react quickly to geopolitical events and process the impact of the developments on the asset class being traded. To successfully navigate the volatility stemming from such events, you can adopt several investing strategies. Understand and embrace your investing time frame. If you're a longer-term investor, be ready to weather the storm. You should aim to diversify your portfolio and consider including safe-haven assets in your portfolio. And lastly, keep an eye on the news so that you are not caught by surprise market reactions due to geopolitical events.
As you noticed above, the charts of commodities for oil and gas came from TradingSim. We are a 24/7 trading simulator that allows you to replay markets and analyze your performance through simulated trading. As the world experiences geopolitical volatility, there is no safer place to analyze your investing strategies than in our virtual trading world.
Inside, you can see the historical charts of all your favorite stocks, commodities, indices, and cryptocurrencies. Better yet, you can bookmark specific times in history to replay. Join us for a free trial and learn to manage your risk in the markets.