How geopolitical events and risks typically affect markets

Historically, geopolitical events such as tensions or confrontations between countries like Israel and Iran often cause short-term market volatility, but their impact on medium- to long-term equity or FX performance tends to be limited and highly conditional.

Short-Term (Days to Weeks)

  1. Equities: 
    • Sell-offs are common in the immediate aftermath of military actions or escalation threats.
    • Defense, energy, and commodities often outperform (due to risk-on/risk-off rotation).
    • Broader equity indices like the S&P 500 or MSCI World typically drop by 1–3%, sometimes more, depending on the severity.
  1. Exchange Rates (FX): 
    • Safe-haven currencies such as the USD, CHF, and JPY tend to appreciate.
    • Emerging market currencies and currencies of countries close to the conflict often depreciate.
    • Risk sentiment drives volatility more than fundamentals.

 

Medium-Term (1–3 Months)

  1.  Equities:
    • Markets often rebound if the conflict does not escalate into a prolonged war.
    • Historical data shows that equity indices typically recover within 1–2 months after initial sell-offs (e.g., after the Iraq War started in 2003, the market rebounded in under a month).
    • Energy stocks may stay elevated if oil supply fears persist.
  1. FX: 
    • FX moves normalize unless the conflict impacts trade flows or oil supply chains. For example:
    • If the Strait of Hormuz is threatened, oil-linked FX (e.g., CAD, NOK) may stay strong.
    • If oil prices spike, EM currencies could remain under pressure.

 

Long-Term (6–12 Months)

  1. Equities: 
    • Long-term performance tends to be driven by economic fundamentals, earnings, and monetary policy, not geopolitics.
    • Even large events like 9/11 or the Gulf War had no lasting equity impact over a 12-month horizon.
    • The geopolitical risk premium fades unless the event leads to a sustained macroeconomic shock (e.g., 1970s oil embargo).
  1. FX: 
    • No consistent FX trend unless the conflict leads to a sustained change in capital flows, interest rate differentials, or inflation.

Key Lessons from History

Event Equity Impact FX Impact Duration
Gulf War (1990-91) S&P 500 -16% pre-war, +20% 3 months post USD strengthened mildly ~6 months
Israel-Hezbollah War (2006) Limited equity impact Oil prices rose but FX normalized ~2 months
US-Iran tensions (2020) Market dropped briefly, recovered in <2 weeks Gold & JPY spiked, then reversed <1 month
Russia-Ukraine War (2022) Sharp EM and European sell-off, then partial recovery EUR & EM FX down; USD & CHF up Lingering due to sanctions

 

Conclusion

Geopolitical shocks like Israel-Iran tensions: 

  • Cause brief spikes in volatility and sector rotation (toward defense, energy, safe havens).
  • Rarely derail long-term bull markets unless accompanied by economic contagion (e.g., oil shock, sanctions).
  • FX markets react more immediately, but trends mean-revert unless the conflict disrupts trade routes or commodity supplies.