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Global financial markets have been under intense pressure since the United States and Israel launched military operations against Iran on Saturday, February 28. The sell-off wave affected global equity and global bond markets (due to rising interest rates), with precious metal prices tumbling on the strength of the dollar in foreign exchange markets and rising yields.
Silver prices fell 16%, gold fell 11%, European stock indexes fell 10%, the S&P 500 fell 5%, and Western bond prices fell 5% due to a sharp increase in market interest rates. This is the overall situation that has developed in financial markets since the military operation began on February 28.
During this period, the market has seen two clear leaders: oil prices have increased by 50%, and natural gas prices have increased by 80% (the TTF contract is the benchmark for European natural gas prices and is most affected by current geopolitical events). Explosive growth in energy prices is sharply raising inflation expectations, and against this backdrop, markets no longer expect the Federal Reserve to cut interest rates before 2028.
The chart below shows the performance of select assets across all asset classes between February 27 and March 23:
How to measure geopolitical stress in financial markets? Clearly, the direction in precious metals prices is not the right one. Energy prices are the most accurate market indicator that can measure geopolitical risk in a tangible, direct way. The closure of the Strait of Hormuz has hampered oil and gas supplies to major Asian economies, making oil prices by far the most effective indicator of geopolitical risk.
But there’s a better indicator of geopolitical pressures related to oil prices, and that’s the spread between Brent and West Texas Intermediate crude. The greater this difference, the greater the geopolitical pressure, and vice versa.
Therefore, I highly recommend keeping a close eye on the spread between Brent and WTI. Any early sign of this spread reversing lower would be a leading indicator that it is time to get back into buying in global financial markets.
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