Markets Under the Test of Geopolitical Shock

In a world where certainties fade away, it is no longer a matter of predicting but of remaining steadfast.

Between conflict in the Middle East, growing fragilities in private credit, and investor repositioning, the first quarter of 2026 marks a turning point for financial markets, which are operating in an environment more uncertain than ever. The first Israeli-American strikes in Iran at the end of February propelled the geopolitical risk indicator established by the Financial Times to unprecedented levels since data began in 1982. Despite the tensions, there was no immediate strong correction in stock markets.

Context: The article discusses the impact of geopolitical tensions on financial markets, particularly the resilience of stock markets amid uncertainty.

Fact Check: The article mentions geopolitical tensions in the Middle East and the impact on various asset classes, such as oil and precious metals.

Relatively Spared Stock Markets

In reality, the impact of geopolitical shock initially spread to other asset classes, affecting interest rates, currencies, and commodities first. This dynamic was particularly visible in implied volatility indices.

On the stock side, the VIX index, measuring S&P 500 volatility, peaked at nearly 30, compared to over 50 in April last year when the Trump administration announced reciprocal tariffs. Interestingly, the overall market volatility index surged from 40 to 65 but decreased more slowly.

Diverging Signals on Commodities

Market resilience, especially in stocks, indicates anticipation of a temporary shock, as seen in the oil market. Spot prices for immediate delivery soared nearly $40 since the start of the Middle East conflict due to the Strait of Hormuz blockade. However, tensions are less significant in futures contracts, reflecting expectations of a quick calm amid hostilities.

In addition, gold and silver surprisingly remained stable, attributed to liquidity constraints from institutional investors needing to sell liquid assets like gold to offset less liquid positions, particularly in private debt.

Context: The article draws attention to contrasting reactions in commodity markets amid geopolitical tensions and liquidity considerations for investors.

Fact Check: It highlights the different responses in spot and futures markets for oil and the relative stability of precious metals like gold and silver.

Private Debt: Blind Spot of the Market

Less visible compared to geopolitics, private debt remains a significant structural risk, with signs of tension emerging, especially in high-yield segments. US authorities have already injected liquidity to stabilize the system, indicating the growing sensitivity of this market.

Prudent Central Banks

Central banks proceed cautiously amid uncertainty. The Federal Reserve chose to maintain the status quo due to lack of visibility in assessing the current situation’s impact fully. Monetary policy trajectories hinge on conflict evolution and inflation impact, mainly driven by commodity prices. In case of inflationary pressures, central banks might have to raise rates, with the Fed having more flexibility due to its dual mandate considering employment conditions.

Context: The article discusses monetary policy uncertainties and inflation risks amid global geopolitical tensions and their effects on central bank decisions.

Fact Check: It mentions the Federal Reserve’s cautious approach and potential rate hikes based on evolving geopolitical and economic conditions.

Unchanged Background

If stock markets are correct in assuming the current shock is temporary, long-term investment dynamics should remain intact. Artificial intelligence continues to shape long-term expectations, despite uncertainties about its actual productivity impact.

Closing Thoughts

Despite potential market rebalancing with Middle East de-escalation, risks and uncertainties persist. In an environment where certainties fade, the focus shifts from predicting to remaining resilient.

(Information Source: AllNews)