The ability of financial markets to absorb negative news of a geopolitical nature, from the possibility of a wide-ranging war in the Middle East, to the chronic nature of the conflict in Ukraine or a new wave of protectionism that would strain relations between China and the West if Donald Trump takes over the White House, has created a clear dissonance between the international and economic pages of newspapers. While the former announce an increasingly unstable environment, with targeted assassinations by Israel in the midst of an escalation of the war, incursions by Ukrainian troops into Russian territory, exchanges of tariffs between Washington, Brussels and Beijing, insecurity on the supply routes of the Red Sea, or new sources of instability in Venezuela, the latter are also reporting on the possibility of a new wave of protectionism. In financial news, beyond specific phenomena such as certain increases in the price of gas and the stock market correction last week, which had no origin in international relations and which ultimately remained little more than a warning, there are still hot headlines such as the highs of the main stock markets in the United States and Europe, the record results of Apple, Nvidia and other large technology companies, or the containment of the price of crude oil.
“It’s not that politics has stopped being important, it’s that there are other elements that have greater weight,” says economist Javier Santacruz. The market, in fact, seems to be more focused on the increase in corporate profits, the speed of interest rate cuts by central banks, the promises of cost savings and innovation from robotisation and artificial intelligence, or the evolution of the valuations of the technological giants, than on the exchange of threats from foreign ministries or the missiles flying over petro-states.
Natalia Aguirre, director of analysis at Renta 4, believes that certain news items tend to generate noise that then fades away. “Geopolitics has an impact in the short term, increasing volatility and can lead to profit-taking in markets, but the macro is more important, understood as growth, inflation, what central banks do with interest rates… and the micro, that is, business results, what companies do and their profits in the medium term.”
The case of how oil reacts to geopolitical shocks is one of the most complex. Several experts from the European Central Bank studied the issue in depth and published an article on the subject full of examples. “Immediately after the 9/11 attacks, the price of a barrel of Brent rose by 5%. However, within 14 days it fell by around 25% due to concerns about weakening demand. When Russia invaded Ukraine in February 2022, the price rose by almost 30% in the first two weeks after the invasion. However, it fell back to pre-invasion levels after about eight weeks. More recently, Brent prices rose by around 4% after the terrorist attacks in Israel on 7 October 2023, before stabilising thereafter,” the authors noted.
The lesson, therefore, is that digestion occurs very quickly, and sometimes its effects tend to be diluted to return to the initial state, or even turn around in the opposite direction. “Geopolitically, Ukraine matters if it affects the price of gas, and it no longer does. The warehouses are full and the price has fallen by 90%. Iran would matter if it closed the Strait of Hormuz, but it should not do so because it would greatly harm China, which is its supporter,” says Ignacio de la Torre, chief economist at Arcano Partners.
In a recent report, Swiss bank UBS believes that it is a mistake to sell in the face of this type of negative news. “The shocks Market shocks resulting from war and geopolitical crises tend to have temporary effects on asset prices and long-term market growth. Investors are often inclined to sell due to immediate uncertainty, hoping to reinvest in the market once the crisis has passed. But in our view, selling is often counterproductive, as it materializes otherwise temporary losses and degrades their ability to participate in the next market recovery.”
Sometimes, the issue is that geopolitical risks remain just that: threats. And the most apocalyptic predictions do not materialize, as Santacruz points out: “On this occasion we are faced with a very high concentration of geopolitical risks, but with less probability of them taking place. Wars are ruled out, as are tensions, protectionism… Everything is fairly assumed.”
The volatility generated by these crises and their potential worsening, however, are another market factor. traders Those who buy and sell shares in minutes have to operate taking into account their consequences. Just like those who are looking at the long term, who can find in the overreaction of investors a breeding ground for opportunities: when the stock market discounted a long inflationary period due to serious energy supply problems in Europe after Putin’s invasion, those who bet on a more optimistic scenario made a profit.
“Markets are in a constant state of flux and uncertainty. Money is made by discounting the obvious and betting on the unexpected,” says a quote from the famous investor George Soros. What was unexpected was to think that in 2024 the S&P 500, the index that groups the 500 most important companies in the United States, would reach historical highs 38 times after a very favorable 2023 for the stock markets and while new fronts of geopolitical crisis were opening in the Middle East.
Immunity with nuances
Aguirre qualifies the moment of supposed euphoria in the stock markets and their immunity to geopolitics. “There is profit-taking in various market segments that could be under stress, such as the big technology companies and in China, both due to their internal economic weakness and international pressures. Trump has promised additional tariffs of more than 60% if he wins, so part of the market fall in China is geopolitical,” he explains.
Another case he cites is that of France, where the ungovernability resulting from the legislative elections has translated into worse performance of the stock markets. Roland Gillet, professor of Financial Economics at the Sorbonne University in Paris and at the Free University of Brussels, believes that the misgivings about the influence that the radical left may have on the government may “cause many companies to flee for fear of tax increases.” And in a context of high deficits and debt, he warns that the situation of the French accounts could worsen if the New Popular Front is able to materialize a program of increased spending, as it intends. “It is the biggest problem in Europe, leaving aside the wars,” he points out.
There is also the possibility that traders who ignore geopolitics in the equation are making a mistake. Experts at ING Think believe that investors may be underestimating the fallout from the assassination in Iran of Hamas’s top political leader, Ismail Haniya. “The market is likely to have to discount a higher geopolitical risk premium until these tensions subside,” they argue. There is another factor at play that pulls in the opposite direction. Machine-driven algorithmic trading accounts for an increasing proportion of daily oil trading – up to 70%, according to TD Bank and JP Morgan. And it does not understand emotions, or geopolitical analysis.
Types versus geopolitics
The reality is that market movements are often difficult to explain, and certainly not to anticipate. De la Torre maintains that the market’s focus is elsewhere. “The good inflation data in the US allow us to glimpse interest rate cuts in September. When the cost of capital falls, the stock market rises. That is much more important in economic terms than the assassination of a Hamas leader in Tehran.”
Interest rate cuts are one of the most easily identifiable fuels in the bullish fire of the stock markets and the economy in general, to the point that in the US there is often a debate about whether it is legitimate to cut rates before an election, given the supposed benefits of this stimulus for the party in power. “It makes stocks go up, it makes businesses prosper, it makes the electorate happy… And we will see if it causes anything else,” said enigmatically about rates the investor Warren Buffett at the annual meeting of Berkshire Hathaway in 2021, when rates were at their lowest and there were fears that they were a source of bubbles. On another occasion, Buffett compared the benefits of low rates for investors to those of the lack of gravity for long jump athletes: they allow you to earn more or go further with the same effort.
There is one date that does seem destined to leave its mark on the markets: the US elections on 5 November. Market operators will be following the result closely. So will analysts such as Natalia Aguirre. “We will all be watching them. And there is already talk of the Trump Trade“That is, which assets and sectors could benefit or be harmed if he wins,” he says.
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