Besides all the macroeconomic indicators and central banks’ press conferences or juicy speeches by theirs governors there is something that can affect the markets even more. It is powerful because usually is rather unpredictable and it strikes when you expect the least. Also, you do not know how much is going to last and how destructive can be. You are probably thinking which is the answer and some of you have might even guessed it. Geopolitical conflicts are that kind of force you do not want to witness as an investor because sometimes can even lead to local wars and who knows maybe to the next World War.
I am writing this article in the light of the events which take place at this moment in Crimea and the existing tensions between the Ukraine and Russia on one side and between Russia and the West on the other side. These types of situations are rare, but have an extremely severe impact on the markets, so that’s why I consider it is so important to know the effects that geopolitical conflicts have on the markets and to act quickly. I will take as an example the Crimean conflict and I will emphasize which financial instruments gain from political disorder and which of them are dumped by investors.
Local currencies of the countries which are in conflict will be the ones being affected. The Ukrainian hryvnia and Russian ruble were tumbling to record lows in front of the US dollar before the Central Banks took action and raised the official interest rate. The second victim is the local stock market. The Russian capital market index, RUS50, dropped close to 12% in one day after the tensions escalated very quickly and the United States threatened Russia with economic sanctions.
Next in line are the European capital markets and the EUR who are going to be affected. Firstly, because it is geographically linked with Ukraine and second of all because in case of a military intervention of Russia in Ukraine, the European economy will suffer. The US stock markets are less vulnerable, but still, you should not underestimate how quick this kind of conflicts can escalate in something pretty nasty.
Until now I was talking about the financial instruments which are hurt by geopolitical conflicts, but now let’s see which are those that are gaining from this kind of political disorders. They even carry a special name, safe haven assets. The list includes the Japanese yen, the Swiss franc, gold, silver and in the last instance the US dollar as it is the currency recognized in almost every country around the globe.
The best way to protect your trading account in face of the uncertainty produced by this kind of geopolitical conflicts it is to count on safe haven assets or to put it more metaphorically, to buy the panic generated by the conflict and sell the euphoria provoked by an eventual settlement of the tensions between the Ukraine and Russia. Until next time, I wish you profitable transactions and beware the markets mood.
Discover how to make your trading strategies more profitable by understanding how to take advantage of the volatility that geopolitical conflicts create for a list of financial instruments.