How Geopolitical Tensions Affect Financial Markets

The global economy is highly dependent on international trade, from lithium from Australia to semiconductors from Taiwan or oil from Gulf States. As a result, even the threat of escalating geopolitical tensions can ripple globally and disrupt supply chains, impacting companies around the world. Moreover, increased restrictions by a trading partner due to geopolitics can also roil financial markets, whether directly through capital controls or indirectly through a rise in uncertainty or risk premia that feeds into market volatility (Catalan et al 2023).

Conflicts over resources like oil are fundamentally tied to the politics of national sovereignty and have long been at the heart of many regional conflicts and power rivalries. The ongoing situation in the Middle East is one example. Similarly, the global shift to renewable energy is reshaping energy geopolitics as competition for critical natural resources drives new alliances.

In addition, the geopolitics of energy and sustainability are increasingly interwoven as new economic priorities and power dynamics shape contemporary global issues. A key example is the need for nations to develop more sustainable infrastructure to meet growing demands on natural resources.

This complexity has important implications for investors. A new FT/Fuceri study finds that investor responses to the risks of geopolitical tensions are significantly influenced by the degree of economic dependence on imported inputs. We found that respondents in countries with more diversified economies, such as the euro area, were less sensitive to the effects of an increase in geopolitical tensions than those in countries with smaller economies, such as Greece or France. This suggests that a better understanding of the links between geopolitical risks and more traditional risk factors linked to credit, interest rates, market, liquidity and operations will help prevent destabilizing spillovers.