Geopolitical Events and Its Effects on Stock & Financial Market

Sometimes, unexpected events shake the financial markets. These surprises can cause sudden ups and downs, creating a lot of uncertainty for traders. One major source of this kind of disruption is geopolitical events—things like wars, international tensions, sanctions, or sudden changes in government policies. Geopolitical events can lead to market disruption, supply chain issues, and economic fluctuations, resulting in trading risks. For instance, the Russian invasion of Ukraine led to major disruptions in the commodity and energy sectors globally. 

Traders need to keep a lookout for geopolitical risks and to put in place risk management strategies to avoid losses and build robust portfolios for the long haul. Let us try to understand in detail geopolitical events and how the markets react to them. 

Historical Market Reactions to Major Geopolitical Events 

There is a long history of geopolitical events and stock market reactions to the same. Terrorist attacks, tensions between countries, wars, assassinations, sanctions, policy changes, and elections -- it’s a long list of possible factors that can result in economic uncertainty. For instance, national elections may lead to higher market volatility stemming from uncertainties regarding the incoming government’s policies that may impact economic growth prospects. This leads to sudden swings in stock prices, fluctuations in oil prices and other commodities, and other events. 

For instance, following Donald Trump’s return to the White House, the three major indices (Dow Jones, S&P 500 and Nasdaq) jumped sharply, Bitcoin touched a new high, treasury yields spiked, and the dollar went up. Stocks surged in general in response to the election results. Elections often have a way of boosting or slowing down market activity since the proposals of winning candidates drive consumer and investor anticipation regarding future economic growth. Similarly, geopolitical disputes or tensions may lead to the disruption of economic partnerships and relations, which could result in stock market declines. However, over time, the impact of these events gets muted, with other variables like interest rates and corporate earnings playing bigger roles in ultimately influencing market returns. 

You should also make a note of the fact that geopolitical events are generally a single variable impacting the stock market at that time. The historical response of the stock market to any such unexpected event has been to see it fall sharply, with the decline continuing for some time as the market absorbs the potential risks. Yet, in the long term, the market recovers and moves on to touch new highs. 

Geopolitical events impact Forex trading as well, by way of a change in exchange rates. In rare instances, forex markets have witnessed shutdowns following such events. For instance, the bond and stock markets stayed shut for several months after World War I began in 1914, while they also closed for three days after the 9/11 terrorist attacks in the US. 

Possible Key Geopolitical Risks of 2025 

So, from an investor’s point of view, what are the major geopolitical risks that may arise in 2025? Here are a few probable ones:

• Escalating global tension between the US and China, which could intensify and lead to sanctions, trade wars, and more

• Electoral cycles, social unrest, and the growth in populism in several countries, along with political polarisation and nationalist sentiments that could disrupt global trade and investments 

• The imposition of higher tariffs, trade barriers, and export restrictions 

• Increasing cyber attacks, along with threats to vital financial systems and infrastructure

• Energy security concerns due to conflicts/tensions in energy-producing regions

• Extreme weather events, climate change impact, and natural disasters, which could adversely affect sectors like construction, insurance, tourism, and agriculture, among others

• The rise in protectionist policies and nationalism may lead to declining global investment and trade

Strategies for Trading During Periods of Uncertainty 

Trading during major geopolitical events requires robust strategising and extensive market knowledge. Here are some strategies worth considering:

• Diversification: One way is to diversify your investments into multiple geographic regions, industries, and asset classes. This will help you avoid the effect of a single geopolitical event. 

• Investment in Defensive Stocks: Many investors deploy their funds in defensive stocks during periods of geopolitical tension. These sectors, such as consumer staples, healthcare, and utilities, are seen as being unaffected by such events or economic cycles. 

• Short Selling: This strategy involves selling borrowed shares with the anticipation of buying them back in the future at a lower price. This enables traders to profit from potential price declines in affected sectors. 

• Stop-loss Orders: It is vital to set stop-loss orders to automatically sell stocks once they reach a predetermined price point. This helps protect profits and restrict potential losses during volatile periods. Each trade where stop-loss orders are put in place should have defined entry and exit points. 

Traders and analysts recommend carrying out thorough market research before trading during periods of geopolitical tensions. Keeping an eye on the latest developments and updates is essential, along with staying disciplined and patient without getting swayed by short-term fluctuations. 

How to Hedge Against Geopolitical Risk 

Historically, investors have hedged against geopolitical risks by turning to specific commodities in uncertain times. These may include the Swiss Franc in the currency market, and gold or oil, among commodities. Gold, particularly, is seen as a safe bet during periods of geopolitical fluctuations, with oil losing out at times due to tensions in the Middle East and other oil-producing regions. For example, if there’s a conflict between Israel and Iran (which together produce about 18% of the world’s oil), then a major chunk of global crude oil supply may be affected, thereby pushing prices higher. Hence, investing in exchange-traded funds or ETFs may be an option during such periods. 

The Swiss Franc and gold usually do well during volatile periods, with the latter having intrinsic value underpinned by a lower supply. This means that it becomes more popular during periods of rising inflation. You may also consider hedging by investing in inflation-linked bonds, where the principal and interest payments go up or down with inflation. Some also prefer hedging with investments in financial instruments like futures and options. 

Conclusion: Navigating Market Volatility 

Navigating market volatility and risks arising from sudden geopolitical events is crucial to safeguard your capital and limit portfolio losses. Following the right strategy is important in these periods, along with inculcating a patient mindset to weather temporary losses and focus more on the long-term prospects of companies that you’re investing in.