Quick Bites | Geopolitical tensions rising, markets becoming nervous

No one needs reminding that geopolitical tensions are rising, not just in the Middle East but elsewhere too. This has been reflected in markets generally, which seek to embrace a “risk off” attitude at such times and seek haven or hedges in assets such as cash, the US Dollar, oil and energy, gold, and government bonds. Yet while this is a perfectly understandable response, it may not necessarily be the best investment strategy for medium term or long term investors. Historical analysis suggests that while geopolitical events have an impact in the short or sometimes medium term, they are unlikely to have a lasting impact long term, and indeed may offer attractive entry points for disciplined investors.

See below the one year chart of the VIX Index, the so-called “Fear Index”, used to gauge anticipated equity volatility. From a low of 13 in September 2023, the VIX has risen sharply in the past 2 weeks to 21.7. The higher the index rises, the greater the “fear” that markets are vulnerable.

Source: Trading Economics


The move last week in the leading US index, the S&P500, saw it close below its 200-day moving average for the first time since March as seen below. Technical chartists will be looking to see if support kicks in as a guide to whether we will see a rally. The difference, of course, is that US 10-year bond yields are now much higher – very close to 5%, whereas back in March they were around 3.5%. And now markets are in little doubt that Central Banks will keep rates higher for longer.

S&P500 Index – Back below its 200 day moving average

Source: Bloomberg, Barrenjoey



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