Situations such as wars, elections, and global conflicts are likely to endanger the financial markets. Stock, forex, and bond markets are usually affected by such events since these markets are affected by changes in investors’ behaviour and stability of the economy.

For instance, a political crisis may lead to market volatility and decrease stock prices, devaluation of currency, or movements in bond yields. These impacts should be understood in order to enable the investors to make the right decisions in as far as investment is concerned.

How certain political events can affect the stock market

Events in the political arena like assassination, war, election, terror attack etc. have profound effect on stock market indices and all sectors.

It is usually due to the unpredictability that such events bring about in the global economy setting. For instance, elections cause fluctuations in the market as people are unsure of what the new government will do in terms of policies that can affect the economy.

Equity markets opened higher after an assassination attempt on Donald Trump as market participants considered the attack’s implications for the 2024 polls.

Geopolitical events and their implications on the stock market

Although this is not a common event, there have been circumstances in the past when financial markets have shut down completely due to geopolitical impact on markets. Both stock and bond markets were shut down for months due to beginning of World War I in 1914 and for three days following the September 11 terrorist attacks in 2001.

Geopolitical risks and ways to protect them

Investing in volatile markets and being able to identify geopolitical risks in trading which affects your portfolio can be quite challenging. However, knowing the right strategies and approaches, it is possible to protect investments from these threats and fluctuations.

Here are some key steps to consider:

Fight the urge to sell: Short-term fluctuations due to geopolitical factors can lead to panic. However, it is important not to panic and start selling the assets such as stocks. Experience has shown that the effects of international conflicts on markets are temporary and markets quickly bounce back within a few months after the occurrence of a conflict.

• Diversify your portfolio: Investing in different types of securities, industries, and countries is a good way to protect oneself from losses in the market. This way, you diversify your holdings and minimize the risks that are tied to any one market condition.
• Maintain a long-term focus: Short-term fluctuations in the market may be influenced by geopolitical factors, but it is crucial to keep your eye on the long-term. This perspective can help you avoid ‘falling into the trap’ of locking in temporary losses by selling during volatile periods.

Managing risks during geopolitical period 

When assessing the market reaction to geopolitical events in your trading plan, it’s essential to understand the multiple ways conflicts or news events can influence the market. To trade geopolitical events, it is crucial to start with tracking the economic news around the world.

As any event-driven trading strategy, you should be concerned with three key time frames related to geopolitical events, namely pre-event, event, and post-event.

When you are investing in the stock market, there are always uncertainties that surround geopolitical events and how they will affect your portfolio investments. But with effective strategies in place, one can protect his/her investment against these risks and fluctuations in the market.

Trading during the geopolitical event

It is a geopolitical event that as it progresses, there is increased market fluctuation, and you are either proven right or wrong. Depending on the kind of event that is being anticipated, the market could remain affected for as long as one year or even more.

However, the rise and fall due to a geopolitical event will stabilize at some point in the future. The price of oil that increased by nearly 50% in the first half of 2022 went back down to the levels of January 1st in the summer even though the Russia-Ukraine war continued.

What is the meaning of geopolitical risks in trading?

Geopolitical risk simply means any threat to a country’s political, economic, military and social standing in the international system. All of these can significantly affect the economic position of several countries and will cause ripples in the forex market.

Geopolitical risks in trading include political instability, civil strife, trade tensions, changes of government, bribery and corruption, terrorism, natural disasters, epidemics and other diseases. These events have several effects on the value of the currency in a country.

How different geopolitical occurrences affect the forex trading markets

The impact of economic uncertainty in trading on currency fluctuations often affects multiple currency pairs, not just a specific one. Since these events can influence more than one country, then forecasting their consequences on the forex market is even more complex.

Something that happens to one currency can affect others depending on how traders are responding to it. For instance, increased volatility from traders in famous currencies such as USD or EUR may lead to traders shifting their money to safer currencies like the Japanese yen or Swiss franc.

In what ways does the central bank affect the forex?

Monetary policy is executed by central banks based on the impact of geopolitical events on the economy. For instance, the US Federal Reserve fixed the federal funds rate at O% to reduce the cost of credit for households and businesses in the course of the Covid pandemic.

Geopolitical risks are among the drivers of risk that can trigger massive fluctuations in currency markets. Nevertheless, there are many types of geopolitical risks and each type can impact currencies in various manners.

Here are some of the recent geopolitical events and some of the trading strategies applied to manage them.

Covid pandemic

It is within the context of this modern economy that Covid is a prime example of a global health crisis. The pandemic resulted in high levels of fluctuation in both the global markets and the various types of assets, as well as in the major currency pairs.

For instance, while the US dollar strengthened as a safe-haven currency, the British pound sterling (GBP), New Zealand dollar (NZD), the Canadian dollar (CAD), Mexican peso (MXN) and South Korean won (SKX) declined due to their heavy dependence on commodities trade and international business.

The dollar was lower by at least 5% against other safe-haven currencies, including the euro (EUR) and Swiss franc (CHF), in the first half of 2020. Central banks and governments also acted in such a way to try and support their respective currencies.

Russia-Ukraine war

Russia and Ukraine war caused a significant impact on the markets such as commodity futures, forex, European &US equities etc. This led to an increase in energy prices, which added to the already elevated inflation rates that stemmed from stimulative fiscal policy, which central banks were implementing as part of their Covid recovery strategies.

In the forex market, Russia has had its money and currency taken away from most exchanges and its central bank frozen. Other European currencies that were in the neighbouring countries like the Polish zloty also fell as trade was affected.

A crisis with negligible effect on bonds

Turning to the bond markets, however, the start of a major war in Europe on 24 February 2022, the first time since 1945, was a minor event. It is true that yields took a bit of a hit: 25 bps, simultaneously, on the 10-year US Treasury and on the German benchmark for the same maturity.

T-Note and Bund yields went up slightly right after this. Why did this happen? Russia’s aggression had not enough time to shape the expected impacts on the bond markets.

They were completely carried away by the US central bank’s action to hike its key rates on March 15 and this marked the beginning of the most aggressive cycle of global monetary policy tightening in over forty years.

An independent market with its own regulations

We cannot even feign that the accelerated inflation rate that justifies this shift in monetary policy is due to the conflict in Ukraine. Annual inflation rates were well beyond the acceptable levels for central banks, but up until autumn 2021, they were insisting that the inflation rates were only temporary.

The specificity of the context of the bond market, which is characterized by a shift in the paradigm of global monetary policies, is and was, to be more precise, over-determining.

The current pressure on global long-term yields, amidst intense global politics and trading in the Middle East, contradicts the flight-to-quality hypothesis but stems from the same concept.

Conclusion

Understanding geopolitical events are crucial for every trader, whether one is involved directly in trading on geopolitical events or need to avoid the risks associated with them.

Speculative trade can be compared to breakout trade, you take positions before the breakout occurs, always incorporate safety features such as stop loss, do not take positions after the breakout.

To be able to withstand such events, you need to regularly rebalance your portfolio and diversify it depending on your risk tolerance level.