Why is all the geopolitical uncertainty not impacting markets much?

Highlights: Investors are trying to assess the implications of the events surrounding Venezuela, Iran, and Greenland, as well as the news of the grand jury investigation into Federal Reserve Chair Jerome Powell. Some readers might expect markets to get nervous, but unless the situation escalates significantly, we think the market reaction should remain limited. That’s because markets have become somewhat desensitised to geopolitical uncertainty; oil markets are in an oversupply situation; the Fed should remain independent, and the earnings outlook is healthy. We continue to manage market dips with alternatives and multi-asset strategies, through our tactical overweight on gold and hedge funds and volatility-management tools.

• Geopolitical uncertainty has jumped again because of several events. While there can be an immediate hit to risk appetite, the extent of this tends to depend on whether there is a global economic impact. The most important channel to watch is the oil market, especially as both Venezuela and Iran are oil producers. Venezuela, however, only accounts for 1 per cent of global crude production and the US wants this oil to continue to flow. Iran is more important, at 4.3 per cent of global oil supply, so we need to watch how that situation evolves. The oil market is in oversupply though, which reduces the impact of any potential interruption to oil supply
• Regarding Greenland, the market seems to assume that there will be no military action. Europe’s financial markets are most exposed to the headlines, and Europe’s politicians are trying to balance cooperation with the US on Ukraine with support for Denmark as an EU and NATO member in the new world of the ‘Donroe doctrine’. Common interests are likely to limit the impact on markets, but EUR could weaken vs USD and JPY, if the situation escalates
• As for the Fed, it has already reappointed the presidents and first vice presidents of 11 of the 12 Federal Reserve banks to new five-year terms beginning March 2026. This should ensure that the Fed majority can continue to base rate decisions on economic data. We therefore continue to expect no further cuts in 2026 or 2027
• We continue to manage volatility with alternatives and multi-asset strategies, as well as our ‘Energy Security’ and ‘Aerospace and Security’ themes. If geopolitical tensions accelerate, we think gold could reach the USD5000/oz mark in H1. Volatility could spike, EUR could weaken, yield curves could steepen, High Yield spreads could widen, and Asian assets could outperform