Financial markets loathe uncertainty. The thought of an impending war has sent world markets into a frenzy.
Convergence of global economies means the impact of war reaches far beyond those directly involved in the struggle. It is not the economic importance of Syria that has rattled investors, rather the heavyweight powers who are weighing in on the conflict.
The consequences of any international military action triggered by the travesties unfolding in Syria go further than a jump in the price of oil and shaky financial markets. They ultimately begin to conflict with commercial liberalism, which will have a more profound impact on financial markets.
Current geopolitical conflicts involve superpowers in their own right – US and Russia and Saudi Arabia and Iran.
The involvement of Saudi Arabia and Russia is significant considering the pair account for nearly 25 per cent of global oil production. Reports say Saudi Arabia has offered Russia an arrangement to control the global oil market, provided they step away from the Assad regime in Syria. This could be the first of many such agreements that begin to break down existing trade as we know it.
Unsurprisingly, the price of Brent crude oil spiked $US3.63 to $US114.36 overnight. Further speculation, or the reality of a new oil alliance, will result in higher oil prices.
With spikes in the price of both oil and gold, stocks leveraged to these commodities will offer some relief for as long as amplified geopolitical tensions oppress equity markets.
Energy-focused stocks, along with utilities, were among the few that managed to gain ground in international markets overnight. The underlying fundamentals of these stocks promise stronger performances during global conflicts. They deal in necessities, despite what is happening miles away from our shores.
The costs of war are often positive economically, with increased government spending an encouraging stimulus. But until we reach this point, markets will be jumpy.
We have seen volatility spurred by geopolitical risk in recent history – February 2011 saw tensions in Egypt come to the forefront of global issues. This was then prominent again in July, with ructions in Israel and Iran also added into the mix.
On both occasions markets lost ground, but rebounded in a hasty fashion.
Market volatility will continue until the US finalises a decision on how it will pursue Syria.