Navigating the Noise: Why Oil is the Ultimate Geopolitical Arbitrator

11 Mar 2026

Dear Investors,

The ongoing U.S. and Israel airstrikes on Iran have thrust geopolitical risk back to the forefront of global markets. With headlines dominated by the threat of a broader Middle Eastern conflict and the de facto closure of the Strait of Hormuz, the instinctive reaction for many is to pull back. However, reacting to daily news cycles is rarely a winning strategy. Instead, navigating these periods requires looking past the initial drop and understanding the historical "drift" of markets following geopolitical shocks.

As the accompanying chart illustrates, not all conflicts are priced equally by global equities. When we map the market's reaction to 25 geopolitical events since 1970, it becomes clear that the severity of a drawdown depends far less on the military scale of the event than its ability to disrupt the global energy supply.

The graph displays the price reaction of global equity markets based on 25 geopolitical events (1970–2026), divided into three categories. Cat 0: 5 Emotional shocks (e.g., 2005 London Subway Bombing). Cat 1: 17 Regional conflicts (e.g., 2011 Intervention in Libya). Cat 2: 3 Energy-driven crises (e.g., 1973 Yom Kippur, 2022 Ukraine). Market reaction is shown through time, relative to the ‘Initial Shock’ moment (t=0). We study the pre-announcement drift (20 business days before) and post-announcement drift (40 business days after) to see how markets react to the news and if geopolitical news is somehow anticipated.

Historically, these events fall along a spectrum. At one end, we see emotional shocks (Cat 0, blue line) —such as the 2005 London subway bombings —where markets initially virtually do not react. The economic impact is localized, and markets move on almost immediately. Moving up the scale are regional conflicts (Cat 1, orange line), which include events like the 2011 intervention in Libya. Interestingly, markets rarely anticipate these effectively; there is virtually no pre-event drift, and equities typically suffer a slight drop in the initial days. Yet, history shows that in these standard regional scenarios, markets tend to recover quickly, often erasing their losses within a month.

The true danger zone, however, emerges when a conflict directly chokes energy markets (Cat 2, green line). During systemic energy crises, such as the 1973 Yom Kippur War or the 1990 Kuwait invasion, the market's reaction is highly pronounced. In these rare instances, global equities typically fall by about 5% in the first two weeks and can continue a negative drift toward double-digit losses in the two months following the onset.

The mechanics behind this sustained sell-off are deeply rooted in macroeconomic fundamentals. A sudden spike in crude prices acts as an immediate tax on the global economy. For corporations, surging transport and input costs trigger a severe margin squeeze, rapidly deteriorating their earnings outlooks. Furthermore, an energy shock creates a unique dilemma for central banks: it simultaneously stalls economic growth while driving up inflation. Stripped of their usual ability to lower interest rates to cushion the economic blow—and sometimes forced to keep rates restrictive to fight that energy-driven inflation—policymakers leave equity valuations vulnerable to a sharp, prolonged downward adjustment.

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Technical Corner

It is important to acknowledge an analytical caveat: because this study relies on a very small historical sample size (luckily there are not that many wars!), it is notoriously tricky to completely nullify the effects of the underlying business cycle. Several of these major historical shocks—such as the 1973 Yom Kippur War and the 9/11 attacks—coincided with preexisting economic downturns. In these cases, the geopolitical shock likely accelerated and deepened a cyclical decline that was already underway. Despite these cyclical overlaps the underlying empirical data and economic theory suggest that energy is a vital driver of geopolitical market risk.

As a side note, it is worth emphasizing the 'hidden cost' of these events: because global equities historically compound at roughly 2% over a quarter, a market that simply returns to flat has still technically underperformed its expected baseline return. Put differently, we are showing simple returns in the accompanying graph, not excess returns.

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This historical lens brings the current crisis (yellow line) into sharp focus. While global regions generally move in tandem during macro shocks, the ongoing intervention in Iran is exposing a stark structural divergence. As soaring insurance premiums force oil tankers to avoid the Strait of Hormuz, driving up global crude prices, the economic fallout is decidedly asymmetrical.

In Euro-terms, the United States has weathered the storm remarkably well, showing a highly insulated drawdown of just 1.2%. In stark contrast, Europe has suffered a 6.2% drop from recent highs, and Emerging Markets have been battered with an 8.2% drawdown. This significant outperformance is primarily driven by currency dynamics. Times of deep geopolitical stress trigger a classic flight to safety, flooding global capital into the U.S. Dollar. For European investors, this rapid dollar appreciation acts as a powerful shock absorber, effectively masking the underlying U.S. equity losses. To a lesser extent, the U.S. also benefits from a geographic buffer: its domestic energy producers are far less reliant on vulnerable Middle Eastern transit routes. While a bottleneck in the Strait of Hormuz acts as a pure capital drain on import-heavy Europe and Emerging Markets, the U.S. is partially shielded by the geographic security of its localized supply.

Ultimately, geopolitics is often just market noise until it chokes the energy supply. The recent strikes have undoubtedly punished energy-vulnerable regions, but the latest signals suggest an eagerness from the United States to avoid dragging this conflict on indefinitely. Should tensions ease and oil flows normalize, we would expect a steep relief rally, particularly in EMEA equities, erasing losses within the month. However, if the energy supply fractures further, the negative drift for import-heavy regions has only just begun.

Best regards,
Werner, Thierry & Nils