These Are the Real Geopolitical Tensions Behind the Markets

Marko Papic, the chief strategist at the Clocktower Group, argues that U.S. markets are far more rattled by tensions between Beijing and Taiwan than Eastern Europe.

Christopher Occhicone/Bloomberg

Christopher Occhicone/Bloomberg

The markets are in turmoil, but the tensions between the U.S. and Russia over Ukraine aren’t a big contributor. In fact, investors seem unperturbed by the mounting fears of war in Eastern Europe.

This nonchalance is reflected in the recent movement of the 10-year Treasury yield, said Marko Papic, chief strategist at the Clocktower Group and the author of Geopolitical Alpha: An Investment Framework for Predicting the Future. One of the few certainties in finance and markets, he said, is that “U.S. bonds almost always rally” when global investor sentiment turns bearish during simmering geopolitical tensions, which leads to declining bond yields. But the 10-year Treasury yield has been on an uptrend for the past few weeks, despite Russia’s increasingly belligerent rhetoric.

The price for U.S. dollars would also normally increase if investors were preparing for potential warfare, Papic said. But the dollar has stayed relatively flat, which he sees as another indicator that the global markets aren’t reacting to the Ukraine crisis. The only major market indicators that might signal a bearish mood by investors toward the Russia-Ukraine tensions are oil prices and gold prices, he added.

“You could argue that this also means the market is unprepared for a potential conflict,” Papic said, but the extent to which the conflict might affect the geopolitical landscape is likely to be very limited. “The chances of an all-out invasion of Ukraine are low,” he said. “There are far too many constraints on Russia to attempt it.” Papic listed a hostile population, an increasingly well-equipped Ukrainian military, and the lack of domestic support in Russia as the main obstacles keeping Putin from unleashing a full-scale attack.

Even if Russia ends up adopting a more aggressive stance toward Ukraine, its effect on the U.S. stock market would be minimal, according to data from LPL Financial, a California-based broker-dealer. The most recent geopolitical events, such as the U.S. pulling out of Afghanistan in August and the killing of Iranian general Qasem Soleimani in January 2020, only caused total drawdowns of less than 1 percent in the S&P 500. “As devastating as a major conflict could be between Russia and Ukraine, the truth is that stocks will likely be able to withstand the geopolitical struggle,” said Ryan Detrick, chief market strategist at LPL Financial. “In fact, looking back at other major geopolitical events throughout history reveals that stocks usually take them as a non-event.”

Papic added that the market has been “desensitized” to geopolitical conflicts as their frequency has increased over the years. In his view, the Russia-Ukraine crisis isn’t significant enough to create long-lasting negative effects for investors, and he feels that the relationship between the U.S. and China will remain the top geopolitical concern in 2022. For one thing, he said, China’s zero-Covid policy can easily disrupt global supply chains. Furthermore, he added, the growing military tensions between Beijing and Taiwan could rupture relations between China and the West, a problem that would have more impact on the markets than the Russian issue, he said.

“China is an important part of the global economy, [but] Russia is only important in terms of commodities, and the West has proven [that it is] incapable of sanctioning commodities,” Papic said. “But China is different. It’s an important global engine. A major conflict over Taiwan could cause a global recession.”