FINANCIAL MARKET DURING WAR - UNDERSTANDING ITS EFFECTS

 

Carlos Manuel Silva Reis

Business Development Manager

IronFX

Socio IOS desde 2021

Explaining what I do it’s not that simple because it’s never easy to describe your dream job. However, here at Cognosis Limited we are experiencing some of the easiest times to explain how this actually works. War periods have immediate and long-term effect in the Financial Market. I prepared some bullet points that will make it easily to understand. Don’t worry, didn’t use big words:

1 - Market Volatility

The outbreak of war often leads to increased market volatility. Investors may become more uncertain about the future, leading to sharp price fluctuations in various assets, including stocks, bonds, and commodities.

2 - Flight to Safety:

In times of war, investors tend to seek safer assets. This can lead to a flight to quality, where investors move their capital from riskier assets (like stocks) to safer ones (like government bonds or gold). This demand can cause the prices of safe-haven assets to rise.

3 - Currency Depreciation/Appreciation:

The currency of a country involved in a conflict can experience significant fluctuations. Factors such as increased government spending on the war effort and decreased economic activity can contribute to currency depreciation. However, in some cases, a country's currency may appreciate if it is perceived as a safe-haven.

4 - Impact on Industries:

Certain industries may be directly affected by war. For example, defence and military-related industries might see increased demand for their products and services, leading to stock price increases. Conversely, industries like tourism or export-dependent industries may face significant challenges due to disruptions in global trade.

5 - Interest Rates:

Central banks often respond to wartime situations by adjusting interest rates. They may lower rates to stimulate economic activity or raise them to combat inflation or stabilize the currency. These changes can have cascading effects on borrowing costs, investment, and consumer spending.

6 - Commodity Prices:

War can disrupt the production and transportation of commodities, leading to price spikes. For example, conflicts in oil-producing regions can lead to higher oil prices, which can impact industries and consumer spending.

7 - Geopolitical Risk Premium:

Investors may demand higher returns to compensate for the increased uncertainty associated with geopolitical conflicts. This can lead to an increase in the risk premium attached to various assets.

8 - Government Debt Markets:

The outbreak of war often leads to increased government spending, which can be financed by issuing more debt. This can affect government bond markets, leading to changes in bond yields and prices.

9 - Long-term Economic Impact:

Depending on the scale and duration of the conflict, the war's long-term economic impact can be significant. Infrastructure, productivity, and human capital can be damaged, which can have lasting effects on a country's economy and financial markets.

10 - Global Spillover Effects

Wars can have ripple effects across the global economy and financial markets. Trade disruptions, supply chain interruptions, and shifts in geopolitical alliances can impact markets far beyond the immediate conflict zone.

It is important to note that the specific impact of war on financial markets can vary depending on the unique circumstances of each conflict. Additionally, government policies and interventions, along with the response of central banks and global institutions, can also play a significant role in shaping the market's reaction to a war.




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