Why Geopolitical Events Matter to Traders : Introduction
If you read or watch finance news regularly, you have likely seen them cover the political developments of other countries closely. Whenever there is an election in Europe or Middle East, you have likely seen these companies cover this news. The same is true when there is a major escalation in certain countries. As a trader, the question that comes to mind is, with all the other financial related news, why should finance media cover politics?
The answer is simple. Geopolitical issues and financial markets are intertwined. By this, I mean that you can’t separate the financial market from the geopolitical issues. For example, assume that company A is the biggest producer of corn. If the country goes to war, it means that the supply chain of the corn will be affected. As such, the price of corn is likely to go up because of the supply and demand dynamics.
Recently, the main geopolitical issues have been in the Korean peninsula, Middle East, and even in Europe. In the Middle East, Donald Trump announced that he would move the American embassy to Jerusalem. Today, the embassy is being opened. This announcement means that the US will be the only country to have its embassy in the contentious city that is claimed by Israelis and the Palestine. After the announcement, the crisis in the region continued with hundreds of people being killed.
Last week, he announced that the US will pull out of the Iran deal and initiate economic sanctions against the country. Again, the US pulled out of a deal that it helped negotiate. This means that Iran could start building its nuclear weapons, although the leaders have promised not to. All this has made the Middle East more volatile as Iran and Israel seek to dominate the region.
In the Peninsula, there are hopes. After months of escalation, the US and North Korea are gearing up for a meeting. This will be the first meeting between the two countries ever. People are optimistic that the two regions will come to an agreement. North Korea has already released three American hostages. They have also committed to a complete denuclearization of the peninsula.
In Europe, the Brexit negotiations are ongoing. However, there is a stalemate and it has to do with the customs union. The hybrid model that Theresa May has suggested has been approved and opposed by members of her cabinet. This means that the country could have a hard Brexit.
In North America, tensions are rising and it has to do with NAFTA, a trade agreement signed more than 20 years ago. Trump vowed to exit from the deal because of its unfavorable treatment on Detroit workers. An exit from the deal will be a big blow to the relations among the three countries.
All these issues matter to traders. For example, a growing crisis in the Middle East will mean higher crude prices. This is because a crisis will lead to disruption in the oil sector. An escalation in the Korean peninsula would lead to a strong yen and business disruption. A problem in North America would lead to a major disruption in supply chain as American companies in Mexico come up with plans to relocate.