This is part 2 of how the current geopolitical risks may impact financial markets.
As I noted in “Ukrainian Crisis and it’s impact on the Financial Markets” while I do not ignore Geopolitical Risks but only focus to the extent they might impact Markets and trading
In the world of geopolitics, there is nothing like the tinderbox in the Middle East. In this regard, I won’t discuss the situation and only focus on potential impact on financial markets.
As with all geopolitical crises, the longer the event goes on the more financial markets get used to it and the less impact it has on trading. Only a shift in the balance of risks or an escalation/spread of the crisis would force financial markets to pay notice.
This is the case with the current Middle East crisis where the risk would be an escalation that drags the USA further into it or anything that would push up the price of crude oil. Barring these risks escalating, financial markets, for now, will likely treat this crisis as a background factor.
Being one of the major reasons for markets to move, crude oil prices tend to create hysterical atmosphere within the traders, and create numerous financial imbalances around the world.
Ukrainian war brought a huge negative impact on European prices, production, logistics, inflation, and so on, but Middle East war is more of a worldwide crisis …always was.
There is also a political risk in the USA ahead of the national elections over this emotionally charged issue. Financial markets seem to be looking ahead to some sort of ceasefire that would result in a pause in the conflict and potentially ease the political impact ahead of the elections.
The Hot Potato Game
So, bottom line, trading a geopolitical crisis is like playing the game “hot potato.” In this game, players form a circle and pass around a proxy potato (e.g. a ball, beanbag, etc) quickly, pretending the “potato” is steaming hot. When the music stops the last person holding the hot potato is eliminated from the game.
This is like trading a geopolitical crisis, such as the current ones in the Middle East and Ukraine. The initial reaction is to trade it like a hot potato, reacting to every headline. However, when the music stops and markets move on to the next focus, if you are still trading the initial reaction, you will be stuck holding what is not longer a potato.
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