Home ›› 25 Feb 2022 ›› Opinion
Financial markets have been on edge over the past few weeks as developments on the Russia-Ukraine border continue to be the major driver of price action. While central banks are still the dominant underlying theme, traders have to contend with uncertainty over the geopolitical situation, something that is tough to quantify. In this environment, gold has enjoyed solid gains as its role as the traditional safe-haven asset.
One thing that enthrals market followers, be they economists, analysts, investors, traders or speculators, is the simple day-to-day challenge of predicting and evaluating macro and micro news that affects price and risk. After all, those taking responsibility for holding positions in financial markets are effectively “risk” managers. And these market participants can at least try to predict the outcome of central bank decisions by constructing models based on precedent, economic data and commentary from officials.
But the outcome of geopolitical events is not in any playbook, even if history shows which eventualities may result. So, the outcome of Russia’s stand-off, like any other geopolitical incident, is the kind of so-called “tail risk” that cannot be accurately modelled and may have huge consequences for the global economy. This means outcomes are uncertain with volatility elevated — and this is generally the worst that can beset a market.
For example, volatility in the US government bond market, generally known as “the bedrock of the global financial system”, is close to its highest level since the peak of the market instability during the coronavirus crisis. The concerns about monetary policy tightening among central banks to rein-in rampant inflation have added to the mix.
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