Trading the Geopolitical Risk: Oil Shock and Market Reaction

Hey people. Not a great weekend we shall say, and nobody really knows yet how the week will look.

As you know, the US and Israel carried out major strikes on Iran. We already see the dollar gapping higher as a safe haven, same with metals. Iran has also stated it is currently not willing to negotiate, which increases uncertainty and keeps geopolitical risk elevated.

is also higher and may stay supported after Iran warned that ships should not pass through the Strait of Hormuz. Around 20% of global oil supply moves through this channel.

The longer disruption risk in the Strait of Hormuz remains, the longer oil can stay elevated and that feeds into higher prices and inflation, some may call it stagflation. This matters because the longer oil stays bullish, the higher the recession risk becomes.

On the other hand, the sooner oil tops and pulls back, the better for equities. OPEC is already discussing increasing production in an attempt to limit price spikes.

Higher energy prices also make central banks more cautious. Rate cuts could be delayed and that can keep stocks in a corrective phase for now.

However, there is also an important historical observation. After major geopolitical escalations, wars, or invasions, stock markets often bottom very quickly, sometimes only days after the first shock.

2003 Iraq War: the bottomed just before the invasion and then started a multi year bull market.
2014 Crimea crisis: a brief dip and markets resumed the bull trend.
2022 Russia invasion of Ukraine: markets dropped on the invasion and bottomed within a few trading days.

So wars do not automatically create bear markets. Markets mainly react to uncertainty, and once the first shock is priced, stabilization often follows even while the conflict continues.

For this week it would not be surprising to see pressure on stocks and volatile moves, especially in the first half of the week. After the initial shock passes, markets will start looking for any calming headlines, and stabilization can appear in the second half of the week if the oil price does not continue accelerating higher.

More about stocks, FX, and metals in our webinar below.