The winners and losers so far.
It’s two weeks since the world woke up to the dreadful news of a Russian attack on Ukraine. Notwithstanding the incalculable costs in terms of human lives, as well as human capital and physical infrastructure, we’ve seen much turbulence in the financial markets. So what has happened so far?
Since markets tend to react to geopolitical risks, US Federal Reserve economists Dario Caldara and Matteo Iacoviello recently built a geopolitical risk index (GPR) to be able to compare events at different points in time. It is based on real-time reports in the news of war threats, terror threats, military build-ups, nuclear threats, acts of terror, beginnings of war and escalations.
You can see below their plot of the daily data, which dates back nearly 40 years. The most remarkable spikes capture the 1991 Gulf war, 9/11, the beginning of the Iraq war in March 2003, the London bombings of July 2005 and now the Ukraine invasion. For those looking for some kind of consolation right now, the index reckons that we are still not close to the level of geopolitical risk that we saw in the aftermath of 9/11.
High geopolitical risk has been shown to increase investors’ uncertainty, prompting declines in stock prices and other financial assets. The link with stock market uncertainty is particularly clear in the graph below, which compares the GPR to the VIX indicator of stock market volatility, which is sometimes referred to as the “investors’ fear gauge”.
