Why Geopolitical Events Matters to Traders – Introduction
If you read financial publications like Wall Street Journal or Bloomberg or watch financial television like Fox Business and CNBC, you are sure to see segments dedicated to geopolitics. You see the companies employing people to work at remote areas of the Middle East and Africa and spend a lot of time talking to experts from these areas. If you are new to trading, chances are high that you don’t see the relevance of these news. In this article, I will explain why you should always pay close attention to geopolitical issues.
As the name suggests, geopolitics comes from two words: geography and politics. As such, the term simply means the politics of different countries. It is a sub-branch of the international relations. For example, when two countries make a deal to address terrorism issues, or when two neighboring countries fight for the control of a boarder, these are examples of geopolitics at work.
Recently, we have seen several major geopolitical events. They include: the Russian annexation of Crimea, the ongoing civil war in Syria, the tensions between Russia and Western countries, the Iran deal, and the Brexit vote.
First, geopolitical issues have a major effect on the price of financial assets. This is because in several cases, geopolitical issues can lead to wars which in turn could affect the production, processing, and transportation of products. A good example of this is in the Iran issue. The Iran deal was signed by Iran and other countries like the UK, France, Germany, Russia, and China to prevent Iran from developing nuclear weapons. After signing the deal, Iran was able to sell its crude oil to other countries. This led to increased production which led the price of crude oil to fall.
Another example is the North Korean issue. Last year, when it seemed as if the country was leading the world to a new world war, the price of safe haven assets like Japanese Yen and Gold rose. Today, their prices have fallen because the tensions have decreased significantly. North Korea has promised to denuclearize.
Second, geopolitics could change the dimensions of global trade. The best way to explain is the recent tariffs on Russian oligarchs by the United States. One of the people sanctioned by the US is one of the biggest producer of aluminum in the world. When the sanctions were announced, it meant that his firm would never do business with Western countries. As such, the aluminum produced by his firm found no buyers leading to a significant decline on the price of aluminum.
Third, geopolitical issues could mean more global trade. This happens especially when major world powers come together and sign a deal on trade. A good example of this was when the North American countries signed the NAFTA agreement. This agreement removed tariffs and non-tariff barriers on goods produced by America, Mexico, and Canada. As a result, the trade in the region flourished as American companies moved to Mexico and as cheaper goods crossed Mexico to the US. Therefore, as a trader, you when you are making trading decisions, you should always pay close attention to the geopolitical factors.