3 Geopolitical Risks Weighing on Market Sentiment

It has been a risk-off past couple of days in the financial markets, as geopolitical tensions weighed on sentiment. Here are the world headlines affecting forex price action so far:

1. Malaysia Airlines plane crash in Ukraine

Fresh off the press is the news that a Malaysian Airlines commercial plane was reportedly shot down by a missile somewhere around the Ukraine-Russia border. Bear in mind that the conflict between Russia and Ukraine has been going around since February and hasn’t shown signs of subsiding over the past few months.

Investigators described the remnants of the explosive device as a Russian-made antiaircraft missile, although Russian officials have denied any involvement. Meanwhile, Ukraine accused pro-Russia separatists at the border for striking MH17 in what it referred to as a terrorist attack. A few days back, separatists have bragged about shooting down at least three Ukrainian military planes flying near the border.

Equities and higher-yielding currencies sold off sharply when the news broke out, and how the investigations unfold could continue to have a significant on risk sentiment in the coming days.

2. Israel ground operation in Gaza

In another side of the world, another dangerous conflict is going on between Israel and Palestine. Although both countries have been at odds since the 50s, tensions flared last month when three Israeli teenagers were killed in the Palestinian-occupied West Bank, followed by the death of a Palestine teen a few days after.

Hamas, a Palestinian Islamist political organization and militant group, has been at the heart of this conflict, as it has conducted a number of attacks on Israel since its establishment in 1987, bombarding the country with several assault rockets from the Gaza Strip recently. Yesterday, Israel declared that it is launching a ground offensive in Gaza to target tunnels used by militants to initiate attacks.

The volatility index (VIX), which is widely considered to gauge market fear, jumped 37% to reach its highest level since April when the announcement was made. Bear in mind that Israel has already been launching airstrikes for days and their decision to send in the troops could be a signal that the conflict is just about to worsen.

3. U.S. and Russia exchange new round of sanctions

Taking the backseat among the tensions that have resulted to several civilian casualties in the past few days is the heated exchange between U.S. and Russia. Recall that the EU and the U.S. government stepped in to impose sanctions on Russia’s annexation of Crimea last March, putting restrictions on Russian companies in the energy, mining, financial services, and defense sectors.

This week, the U.S. doled out another round of sanctions on Russia’s energy and banking companies in its attempt to keep Putin from supporting Ukranian pro-Russia separatists. The Russian government has denied any involvement in stoking the tension in the border, although Putin has threatened to respond with “painful” countermeasures.

Retaliation from Russia could have serious effects on the global economy and market sentiment. On the line is Russia’s support for the U.S. government’s efforts to talk Iran out of its nuclear program, as the Russian Foreign Ministry issued a statement saying “Such behavior of the Obama administration also inevitably affects the possibilities of our cooperation in many other areas.”

While the cliché “bad things come in threes” seems to apply in this current situation, it is a very rare and unprecedented occurrence to have several geopolitical tensions affecting market sentiment. CNN’s Fear and Greed Index, which also measures risk appetite, has plunged into levels reflecting fear after indicating extreme greed a month earlier.