War in the Middle East was greeted in financial markets with a shrug. Are markets underestimating the geopolitical threat?
Billionaire investor Paul Tudor Jones says this is the “most threatening and challenging” geopolitical environment he has seen, but markets disagree. BlackRock’s Geopolitical Risk Indicator, which aims to capture market attention to geopolitical risks, has risen somewhat in recent months, but remains way below levels seen during Russia’s initial invasion of Ukraine and the 2020 Covid-19 pandemic.
Stock markets actually rallied in the days following the Hamas attacks on Israel. Yes, stocks were oversold and thus ready to bounce, but the reaction in other markets such as oil, gold and the dollar was similarly nonchalant.
Markets are betting the conflict will remain localised. That assessment may change, with various strategists cautioning that the implications could be global rather than local, affecting the US, Iran, Saudi Arabia and Russia, among others. The conflict also increases the odds of a 2024 US recession, says the ordinarily bullish Ed Yardeni of Yardeni Research.
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[ Oil price jumps as Hamas attack on Israel raises supply fearsOpens in new window ]
Nevertheless, history suggests ordinary investors should not overthink the market response. The effect on stocks following most geopolitical shocks tends to be fleeting, and markets seemingly think this time will be no different.
