Any type of geopolitical unrest in the world has a massive effect on financial markets. It not only affects the economies of the countries involved but also the whole world. This is because the world economy is interconnected today more than ever. Particularly, wars can ignite a chain of events that can be costly to many countries’ economies. The Israeli-Palestinian conflict has been a source of geopolitical tensions for decades. Unfortunately, each time it flares up, it has significant global repercussions.
This article will explore the cross-asset correlations between bonds, stocks, and forex during the Israeli war. This is important for traders to know whether they are day trading, swing trading, or scalping. Let’s jump in.
Summary
The Israeli War and How it Affects Financial Markets
Historically, the Israeli war has had a significant effect on financial markets. The uncertainty and geopolitical risks associated with such events can influence the behaviour of different assets. To better analyze the cross-asset correlations during the Israeli war, we have to understand how it affects individual assets. We will examine its effects on bonds, stocks, and forex and then see the correlations between them.
Forex
The forex market sees probably the most movement during geopolitical unrest. Notably, the fluctuations that this market sees are complex. This is because there are various dynamics that come into play. For starters, safe-haven currencies rise in value whenever there is uncertainty in the market caused by geopolitical turmoil. Such currencies include the US Dollar (USD), the Swiss Franc (CHF), and the Japanese Yen (JPY). Investors seek refuge in these currencies to offset the risk associated with the Israeli war.
Secondly, the Israeli war introduces a geopolitical risk premium. During times of war, the perceived risk associated with holding a currency goes up. Consequently, this can cause an increase in the value of select currencies. Specifically, the most traded currencies see an increase in value.
Further, there are currencies whose values move with the value of some commodities. As the Middle East is a big oil producer, any turmoil affects the prices of oil. An increase in prices causes the upward movement of some currencies. Specifically, the Canadian Dollar, the Colombian Peso, the Russian Ruble, the Norwegian Krone, and the Brazilian Real see price hikes as oil prices inflate.
Bonds
For the most part, investors see bonds as safe-haven assets during times of geopolitical unrest. When an Israeli war or conflict escalates, investors tend to seek the relative safety of government bonds. More specifically, traders tend to flock to bonds issued by economically stable countries. The demand for bonds increases as investors seek to preserve capital and reduce risk exposure. This leads to a decrease in bond yields while their prices rise. As such, they reflect the inverse relationship between bond prices and yields.
Stocks
Stock markets are probably the most reactive to geopolitical events, including the Israeli war. Generally, the impact of wars on the stock markets is negative in the short term, but it can vary. A decline in investor confidence during times of war can lead to stock market sell-offs. However, there are some stocks that may appreciate in value during times of geopolitical turmoil. Specifically, during the Israeli war, industries such as defence, oil, cybersecurity, and energy may see a surge in stock prices. This is due to the increased demand for their products or services. Conversely, some industries such as tourism and infrastructure development may suffer and see stock prices decline.
Now we have looked at the Israeli war’s effect on these different assets. Let’s shift our focus to the correlations between the various asset classes during the war.
Cross-Asset Correlations During the Israeli War
Forex and Bonds
For the most part, safe-haven currencies move alongside bonds as both are seen as low-risk assets. When uncertainty hits the markets, traders tend to flock to these assets as a shield against risk. Some other currencies and bonds have a more direct relationship and move in tandem with each other. For example, when traders invest more in US Treasury bonds, the demand for the US dollar rises. As such, a stronger US dollar is expected in such situations.
Forex and Stocks
There are various factors that come into play when we are looking at the correlation between forex and stocks. Both are affected by geopolitical events. However, the value of stocks is more tied to domestic economies while international economic and geopolitical factors may affect forex more. As such, stock markets are more responsive to company-specific news and economic data. On the other hand, forex markets react more to global sentiments and geopolitical events. Therefore, during the Israeli war, the value of currencies might be in constant move while stocks remain relatively stable or may move in tandem to a lesser extent.
Bonds and Stocks
Bonds and stocks usually have an inverse correlation in prices during times of conflict. Stock markets usually see a decline as investors move their money into bonds for safety. However, it is important to remember that correlations are not perfect and they can be influenced by other factors. These include central bank policies and economic conditions.
Closing Remarks
Historically, Israel wars have had a profound impact on financial markets. Forex currency pairs, stocks, and bonds all see movement as a result of the geopolitical unrest in this region. As investors see bonds more as safe havens, traders may invest more in this market. On the other hand, stocks usually see a negative effect due to uncertainty caused by geopolitical turmoil, although some industries may benefit. Further, forex markets experience fluctuations driven by safe-haven currencies, geopolitical risk premiums, and commodity price changes. The cross-asset correlations among these three financial assets are complex and influenced by several factors. Understanding these correlations is crucial for investors and traders looking to navigate the challenging waters of financial markets during Israeli wars and other geopolitical crises. Either way, diversification during such times seems wiser than ever.
