Geopolitical tensions are reaching fever pitch levels, with the ongoing war in Ukraine, a deteriorating situation between Israel/Gaza, and now US and UK reprisals against terrorist sites in Yemen. Viewed in perspective, the world is indeed in a precarious predicament. Yet trading and investing activity continues unabated, albeit with redefined parameters.
The stock market is impacted by uncertainty. The correct term attributed to this is volatility. Stocks, commodities, indices, currency pairs, and contrarian financial instruments such as cryptocurrency et al., are highly reactive to sabre rattling. War has dramatic and far-reaching implications for traders and investors, often shortening the horizon to the immediate future.
For example, commodities markets feel the pinch more acutely than others, given the world’s reliance on Brent and WTI crude oil. Energy prices whipsaw dramatically whenever OPEC countries modify production/output capacity. Granted, minor military incursions have minor impacts on financial activity. However, the current conflagrations are proving to be intractable conflicts with long-lasting effects.
Why do wars impact financial instruments?
It is well-established that commodities markets are often first to suffer the ill effects of global tensions. This is exacerbated by ongoing tensions in the Red Sea, where pirates, terrorists, and state-sponsored militants are intentionally targeting the international shipping of at least 50+ nations in the said area. That Allied forces were required to retaliate against the blatant and unprovoked targeting of cargo vessels was unavoidable.
Unnatural impingement of demand or supply in commodities resources naturally impacts the price of those underlying assets. Crude oil, grain barley, wheat, sorghum, livestock, textiles, precious metals, et cetera, are all impacted when pirates hijack cargo vessels. This pushes up prices in the short term, resulting in a net long position with CFD commodities. This is easily evidenced by the world’s leading trading platform in MT4, facilitating CFD forex and stocks trading, and various commodities, including hard and soft commodities.
How are commodity prices determined?
A cornucopia of factors impacts commodity prices. These include the usual suspects – Supply and Demand – and other important criteria. For example, the actual physical inventory, or expected production capacity, is vital in determining commodity prices. Other factors to consider include famine and disease, labour shortages, production capacity, weather conditions, and regulatory measures which could help or harm the efficient and effective production, distribution, and sale of commodities
Practically, it’s important to understand that commodities are typically priced in US dollars. This means that a strengthening of the USD relative to other currencies invariably makes the price of commodities more expensive in local currency terms. Inflationary factors can also dampen demand for non-essential commodities but tend to be relatively price inelastic about necessities such as basic foodstuffs, fuel, and life-saving medical treatments (insulin, biologics, heart medication, et cetera) or products.
How do Canadian traders profit from commodities?
The geopolitical landscape is dynamic: Anything can change at any time. This is precisely the reason that short-term trading tactics and strategies are preferred during times of excessive volatility. Short-term represents the immediate future, within minutes, hours, or days. These types of trades are best suited to derivatives trading instruments like CFDs. Clients of registered trading platforms are not required to take ownership of the underlying financial instrument; CFDs simply track the price movements of the underlying assets. Profits can be generated on rising or falling assets, provided that the correct call has been made upfront.
In these turbulent times, traders must navigate a rapidly shifting landscape as geopolitical strife escalates globally. The heightened tensions between major world powers and key geopolitical hotspots have cast a long shadow over financial markets, introducing unprecedented levels of volatility. Traditional trading strategies may falter in such an environment, urging traders to adapt swiftly to the evolving dynamics.
This volatile scenario underscores the importance of agility and foresight in trading. Investors and traders must focus on short-term strategies, capitalizing on the immediate repercussions of geopolitical events. Derivative instruments like CFDs (Contracts for Difference) become particularly valuable in this context, allowing traders to speculate on price movements without owning the underlying assets. Such tools offer flexibility in bullish and bearish markets, enabling traders to profit from quick shifts in market sentiment.
Ultimately, amid turmoil, the key to successful trading lies in staying informed, being adaptable, and having a keen sense of market sentiment. While uncertainty reigns, those who can deftly navigate these choppy waters may find opportunities amidst the chaos. However, it’s crucial to approach such volatile markets cautiously, understanding the heightened risks involved.