How Geopolitical Events Impact Financial Markets
Gabe Fransen | October 19, 2023
The world of finance and investing is not isolated to the happenings of the world, rather it is intertwined in the web of geopolitical events that shape our global landscape. Geopolitical events, such as wars, trade disputes, elections, and natural disasters, have a profound and often immediate impact on financial markets. This interplay between politics and finance is a complex and ever-evolving relationship, and history is replete with examples that highlight the profound impact of geopolitical events on financial markets. In this article, we will explore how historical events have influenced financial markets and the mechanisms through which they did so, including the remarkable recoveries that followed many declines.
- Market Sentiment and Confidence
One of the most significant ways in which geopolitical events impact financial markets is by influencing investor sentiment and confidence. One historical precedent for this is evident in the aftermath of the 9/11 terrorist attacks. The attacks created widespread fear and uncertainty, leading to a sharp decline in stock markets, with the Dow Jones Industrial Average dropping by 684 points in the week following the attacks. However, within a few months, the markets began to recover as the U.S. government implemented stimulus measures and investors regained confidence in the resilience of the American economy.
- Currency Markets
Geopolitical events have had a direct impact on currency markets throughout history. A notable example is the collapse of the Soviet Union in 1991, which led to significant currency upheaval. The Russian ruble, for instance, went through a period of extreme devaluation as political turmoil gripped the region. Eventually, as political stability returned, the ruble rebounded, reflecting the recovery of the Russian economy.
- Trade Relations and Tariffs
The historical context of trade relations and tariffs reveals the impact on financial markets. The Smoot-Hawley Tariff Act of 1930 is an great example. It was intended to protect American businesses during the Great Depression but ended up exacerbating the economic downturn and contributing to the stock market crash of 1929. After the damage was done, lessons were learned, and international trade agreements were crafted to prevent similar events in the future.
- Interest Rates and Central Bank Policies
Throughout history, central banks have adjusted their policies in response to geopolitical events. A case in point is the 1970s oil crisis when OPEC oil embargoes led to soaring oil prices. To combat inflation, central banks raised interest rates, which had a profound impact on bond yields and the broader financial markets. Subsequently, as the oil crisis subsided, central banks reduced rates, aiding in market recovery.
- Commodity Markets
Geopolitical events have had significant historical impacts on commodity markets. The 1979 Iranian Revolution, for instance, caused a surge in oil prices, leading to stagflation in many advanced economies. As geopolitical tensions eased and oil supplies stabilized, oil prices gradually moderated, allowing economies to recover and financial markets to regain their footing.
- Sector-Specific Effects
Historical examples also highlight the sector-specific effects of geopolitical events. The dot-com bubble burst in the early 2000s can be partly attributed to geopolitical uncertainty following the 9/11 attacks. However, the technology sector rebounded in the years that followed, demonstrating its resilience and long-term potential.
- Long-Term Effects
History is replete with instances of long-term impacts of geopolitical events on financial markets. The end of the Cold War in the early 1990s led to the opening of new markets in Eastern Europe and the former Soviet Union, with economies and financial markets eventually benefiting from increased globalization and investment.
Geopolitical events’ impact on financial markets is not a one-way street of decline; recovery often follows the initial shock. These events, both past and present, serve as stark reminders that the financial world is intricately linked to the broader geopolitical landscape. As we navigate today’s complex global economy, understanding the lessons of history is vital. While it is impossible to predict every twist and turn in geopolitics, being informed and prepared for the potential consequences of such events is essential for managing financial risks and seizing opportunities in an ever-changing world. It’s important to remember that after the storm, the sun often shines again on the financial markets.
How September 11 Aftected the U.S. Stock Market by Marc Davis: https://www.investopedia.com/financial-edge/0911/how-september-11-affected-the-u.s.-stock-market.aspx#:~:text=Market%20Reaction&text=On%20the%20first%20day%20of,during%20the%20global%20coronavirus%20pandemic).
Soviet Ruble: https://en.wikipedia.org/wiki/Soviet_ruble
Smoot-Hawley Tariff Act: https://en.wikipedia.org/wiki/Smoot%E2%80%93Hawley_Tariff_Act
1970s energy crisis: https://en.wikipedia.org/wiki/1970s_energy_crisis
Iranian Revolution: https://en.wikipedia.org/wiki/Iranian_Revolution
Dot-com bubble: https://en.wikipedia.org/wiki/Dot-com_bubble