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Evening Wrap: ASX 200 ekes out gain but major mining and energy stocks implode on China stimulus doubts, tanking commodity prices
Wed 09 Oct 24, 5:37pm (AEDT)
Markets
How does the ASX 200 perform amid rising geopolitical tensions?
By
Kerry Sun
Tue 10 Oct 23, 12:52pm (AEDT)
Source: Shutterstock
Key Points
- Markets don't seem to care: Despite Israel's declaration of war on Hamas, markets have remained relatively resilient
- Oil and gold hit highs: Oil, treasuries and gold prices have risen in response to the conflict, as investors seek safe-haven assets
- History tells us: The ASX 200 has historically performed well after major geopolitical events, with the average 12-month return being 4.4%
We've seen rising geopolitical tensions in the Middle East over the weekend. What impact will it have on markets? All we can do is go by history.
In this piece, I measure the impact of various significant world events on markets over the last 30 years.
What you need to know today
Markets don't seem to care: The S&P 500 opened -0.45% lower on Monday but rallied intraday to close 0.63% higher. Even the Russell 2000 rallied intraday to close 0.6% higher, signalling relatively broad-based confidence. Price action for the ASX 200 was relatively choppy on Monday, closing up 0.23% from a session high of 0.64%. Encouragingly, the market continued to run on Tuesday, up around 1.0% in afternoon trade.
Another oil run: WTI crude rallied 4.4% on Monday to US$86 a barrel. This follows a sharp 8.8% selloff in the prior week. Morgan Stanley says "neither Israel nor its direct neighbors are large oil producers. Hence, we judge the near-term risk to oil supply as limited. That could change in case the conflict were to extend to other countries in the region. However, that too is not part of our assumptions either for now." The investment bank argued that oil prices will likely trade in the US$85-95 range, and in the upper end of that as long as OPEC+ cuts continue.
Gold hits weekly high: Gold is attracting safe-haven demand as markets braced for headwinds and volatility. Spot gold rallied 1.6% to US$1,863 an ounce on Monday. That said, the yellow metal went on a 9-day losing streak between 22 September and 5 October, down 5.4% to an 8-month low.
What does history tell us?
Here's a list of some major geopolitical events going back to 1992 and how the ASX 200 performed after the various events.
Note: The data reflects price returns and not total returns.
Event | Event Date | 1 Month | 3 Months | 6 Months | 12 Months |
|---|---|---|---|---|---|
Soros Breaks Bank of England | 16/09/1992 | -6.2% | 0.6% | 8.05% | 22.7% |
First World Trade Centre Bombing | 26/02/1993 | 4.1% | 8.2% | 18.31% | 28.3% |
Asian Financial Crisis | 8/10/1997 | -8.9% | -2.6% | 1.30% | -10.9% |
USS Cole Yemen Bombing | 12/10/2000 | 2.0% | 0.4% | 0.06% | -0.1% |
September 11 Attacks | 11/09/2001 | -1.3% | 3.7% | 7.24% | -2.9% |
Iraq War | 20/03/2003 | 4.0% | 7.8% | 11.45% | 19.9% |
Madrid Bombing | 11/03/2004 | 0.7% | 1.5% | 5.15% | 23.1% |
London Subway Bombing | 5/07/2005 | 1.7% | 7.9% | 11.02% | 18.5% |
Bear Stearns Collapses | 14/03/2008 | 3.7% | 2.3% | -5.79% | -35.8% |
Lehman Brothers Collapses | 15/09/2008 | -10.7% | -25.5% | -30.50% | -5.8% |
Boston Marathon Bombing | 20/02/2014 | -1.2% | 0.2% | 3.91% | 8.7% |
Russia Annexed Crimea | 24/06/2016 | 8.3% | 5.1% | 9.78% | 11.8% |
Brexit | 7/04/2017 | -0.4% | -1.8% | -3.59% | -1.3% |
Bombing of Syria | 28/07/2017 | -0.6% | 3.7% | 6.17% | 10.5% |
North Korean Missile Crisis | 28/07/2017 | -0.6% | 3.7% | 6.17% | 10.5% |
Saudi Aramco Drone Strike | 14/09/2019 | -0.5% | 1.0% | -20.51% | -11.5% |
Iranian General Killed in Airstrike | 3/01/2020 | 3.2% | -23.5% | -11.87% | -0.8% |
US Pulls out of Afghanistan | 30/08/2021 | -4.1% | -3.5% | -6.07% | -6.7% |
And the average performance across the time frames.
Performance | 1 Month | 3 Month | 6 Months | 12 Months |
|---|---|---|---|---|
Average | -0.4% | -0.6% | 0.6% | 4.4% |
Median | -0.4% | 1.3% | 4.5% | 4.3% |
% Higher | 44% | 72% | 67% | 50% |
What does the data tell us?
Longer-lasting drawdowns have occurred during major events that destabilised financial market and economic conditions, such as the Asian Financial Crisis and Global Financial Crisis.
The Saudi Drone Strike in 2019 also coincided with the escalation of the US-China trade war (where iron ore prices fell from around US$120 to US$80 a tonne) and the US-Afghanistan drawdown in 2021 was in parallel with China's Evergrande Crisis.
The geopolitical upheaval in the Middle East is still unraveling. Will it be contained? Or will it escalate to a much wider conflict that'll add a greater premium assets such as oil, gold and treasuries?
At least for now, markets are focusing on other factors such as the below.
More broadly speaking
The market's recent strength follows a steep September selloff. Some data points that flagged extreme oversold levels include:
Almost a quarter of ASX 200 constituents have hit a 52-week low in the past week.
Less than 10% of S&P 500 components were trading above their 50-day moving average last week.
CNN's Fear & Greed Index hit 'Extreme Fear' last week.
BofA's Bull & Bear Indicator dropped to 2.6 last week, which was a five-month low and a potential contrarian buy signal.
The closely watched US-10 Year Treasury Yield is also rolling over after its mega rally from May lows of 3.38% to a recent peak of 4.88%.
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