While financial markets can be rocked by geopolitical shocks, the effects are usually temporary, says Moody’s Ratings.
In a new report, the rating agency examined the historical financial impact of various geopolitical events — terrorist attacks, military escalations, trade conflicts — since 2001.
“Our findings suggest most movements in asset prices were short-lived, even for oil, which tends to be most vulnerable to such shocks,” it said.
Financial markets typically provide the initial assessment of a potential economic impact of geopolitical events, Moody’s said, as the prices of assets such as oil, bonds, equities, Treasuries and gold, as well as market volatility indexes, “tend to react more quickly” than other economic metrics.
“However, market reaction can often be overblown and other factors may be influencing price movements at the same time, which makes it difficult to isolate the effects of shocks on markets,” it said.
In most cases, asset prices settled down by day 30 from their peak, the report found.
“Even oil prices gradually settled down in most cases over 30–90 days depending on the severity and duration of the underlying event amid increasing clarity on the real effects as time passes and as other fundamental drivers eventually supersede the price trajectory,” it said.
The report also noted that the market responses to these kinds of events “vary greatly in magnitude and direction,” which makes it difficult to assess the impact in the moment.
Oil prices are most exposed to geopolitical shocks, “because supply is concentrated in regions often subject to political instability, conflicts or sanctions,” it said.
“The direction of price movements depends on whether markets see events as possibly affecting supply or reducing oil demand. The region or countries in the conflict and their relative share in the global oil supply or demand influence the size of impact,” it said.
This year, ongoing tensions in the Middle East have kept volatility high, Moody’s said.
“Most asset classes have broadly priced in the recurring tensions this year, but oil prices have continued to fluctuate with events that threaten to disrupt supply or escalate tensions, like attacks in the Red Sea or on energy infrastructure in Ukraine and Russia,” it noted.
“Any further escalation in the Middle East or Russia-Ukraine war, major disruption to key trade routes and mainland China-Taiwan tensions would likely trigger similar levels of volatility in asset prices,” it said.