Why Geopolitical Risk Is Rising For Financial Markets

It has been some time since the financial markets braced for (and reacted to) geopolitical conflict. In fact, it’s likely not even on investors radars right now. And it precisely this lack of concern over geopolitical risk that has my antennae up for potential disruption.

Last February, investors were forced to adjust to the Russian-Ukrainian conflict. This came and went over a short period of time, forcing investors to remain connected and concerned throughout spring. Fast forward to today, and the lay of the geopolitical landscape is perhaps worse… but no one seems to be concerned. In short, when commodities and currencies start to rock the global economic boat, geopolitical risks tend to rise.

The US Dollar has surged higher. Commodities prices have plummeted. And energy and raw materials-rich nations like Russia, China, and the Middle East are starting to feel the heat, especially Russia. Sanctions have ruffled their economic feathers and the worm is turning… this could push the Ukrainian standoff to the forefront again. Why? Because the Russian powers that be are under pressure and likely in need of an adversary.  Sounds a bit crazy, but that’s simply human nature. And the West has done a good (or poor) job of becoming the villain. The problem with the West, though, is that it likely doesn’t have the stomach to take action beyond the current sanctions, so Russia’s next move could prove pivotal.

Check out the chart of the Russian ETF (RSX) breaking to new lows… now that’s pressure, especially with US Equity indices like the S&P 500 and NASDAQ Composite breaking to new highs.

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rsx russian etf - geopolitical risk

As well, the Middle East (in general) is staring at sub-$75/barrel Oil, down $30 in the past 6 months!! The region has been beset by violence and civil war… could the recent bear market in Oil prices turn the worm a bit further?

Below is a chart of Crude Oil prices. It’s hitting the bottom of a 3 year range. A bounce here would be totally normal, especially considering that it’s registering an 18 on the Relative Strength Index (RSI) – meaning it’s deeply oversold. But the damage has been done, and this latest drop could be foreboding for some energy dependent economies.

crude oil prices lower - geopolitical risk

Lastly, Europe is still suffering from economic conditions that haven’t been seen in some time. And the European Union (EU) is getting more and more political. This is fracturing unity within the Euro Zone and pressuring the ECB to take further action. Needless to say, it’s a contentious situation within the Euro Zone.

I know these thoughts are a bit provocative and writing in this fashion is simply not my style. BUT, the silence is deafening. This is purely speculation for now, but the larger point is that investors should keep the possibility of geopolitical risk on their radar. Tensions are rising under the surface.

Follow Andrew on Twitter:  @andrewnyquist

No position in any of the mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.