Could Geopolitics Play Spoiler to the US Economy?

Global stability has embarked on a dangerous downward spiral in recent months, prolonging the anxieties induced over the past several years by the Russian-Ukraine War and rising US-China tensions. Geopolitical embers are increasingly igniting into flames, and while the US economy remains relatively unscathed, escalating tensions could tip market uncertainty into uncharted territory.

According to Blackrock’s geopolitical risk indicator[1], market attention to global risks has risen to its highest level in two years. Set in motion by the October 7th terror attacks in Israel and subsequent War in Gaza. However, perhaps more significantly, uncertainty over these risks has deepened in early 2024 as markets assess a cascading regional spillover with potential global ramifications.

Though the risk indicator remains below thresholds reached early on in the pandemic or after Russia’s invasion of Ukraine, the upward shift has already persisted for several months longer than the shift caused by Russia’s invasion. From January to March 2022, the global risk indicator jumped from 0.2 to 1.0, though it proceeded to improve in the following months, falling to 0.4 by August of that year. Comparatively, while the absolute jump between September to November 2023 was not as severe (0.2 to 0.6), the index has remained elevated in the four months since.

An unfolding humanitarian crisis in Gaza, threats to shipping routes and oil markets in the Gulf, and escalating tensions between Israel and Iran have not only captivated global attention but have intensified market volatility. US crude oil prices initially rose following Israel’s strike on an Iranian consulate in Syria on April 1st as fears rose of widening regional conflict. Oil reached $87 per barrel in the days leading up to Iran’s anticipated retaliation on April 13th, its highest since the days immediately following the October 7th attacks. Natural gas prices have jumped 2% in the week since, and reports of a retaliatory strike on Iran on April 19th likely contributed to a 1.4% jump in the VIX — a measure of market volatility — on the same day.

Blackrock now lists Gulf tensions as the most significant contributor to global risks, outpacing both US-China competition and cyber-attack risks as the most significant threats to global stability. Though beyond the Middle East, concerns about stability loom large despite receiving less international attention.

President Biden recently pitched a plan to triple tariffs on Chinese steel and aluminum imports, a sign that despite efforts over the past year to thaw US-China tensions—including a high-profile visit by Treasury Secretary Janet Yellen earlier this month—political winds continue to push tensions in the direction of strategic escalation.

Further, while not typically the focus of market observers, North Korea’s increasingly provocative posture in recent months has added a new piece to an already complex geopolitical puzzle. Blackrock cites the risk presented by North Korea as increasing overall, with the potential to become more salient as the US presidential election draws closer.

While the US economy has thus far avoided any severe fallout from the increasingly mercurial geopolitical landscape, several of these emerging developments could present critical consequences for domestic markets if intensified further. Moody’s sees US oil prices as a key variable in the 2024 election. Meanwhile, the dynamics of energy market stability, threats to shipping routes, and increasing trade protectionism will continue to influence inflation pressures through implicit channels.

[1]Measures the relative frequency of brokerage reports and news stories associated with geopolitical risks. Index value represents the number of standard deviations from its historical average.