Geopolitical Tensions Fail to Shake Market Confidence, Despite Rising Risks
Despite escalating geopolitical concerns, financial markets have largely remained unimpressed, though subtle signs of nervousness are beginning to emerge. Investor appetite for assets remains robust, particularly in the primary market, even as global uncertainties mount.
Geopolitical headlines are currently dominating the news cycle, with rising oil prices serving as one indicator of heightened risk in the Middle East. According to recent data, oil prices have climbed 10% since the start of the year, rising from a low of US$60 per barrel. Adding to the complex landscape, tensions surrounding Greenland are creating friction in transatlantic relations between the US and Europe.
Overall, market risk sentiment appears surprisingly resilient. While equity markets are exhibiting increased caution, evidenced by a slight uptick in the cost of protection, rates are trending downward, approaching 2.8% and outperforming swaps. However, these movements remain within recent historical ranges and are supported by underlying macroeconomic data, including recent inflation reports from both the US and Europe.
One analyst noted that investors’ drive to deploy capital currently outweighs concerns about geopolitical instability. The primary market continues to thrive, with a recent €10 billion offering successfully absorbed with minimal impact on spreads. The order book reached €106 billion, demonstrating strong demand, though falling short of recent record highs. This performance, even amidst political uncertainty surrounding the French budget for 2026, suggests a degree of relative confidence.
Looking at the broader fixed income landscape, government bonds (govies) and supranational, sub-sovereign agencies (SSAs) are gaining appeal due to their relative stability. Examining 7-10 year iBoxx bond-index spreads since 2014 illustrates this trend. While Italian government bonds offer attractive yields, and French spreads reflect existing political risk, broader corporate and financial credit indices are trading at historically tight spreads compared to the less risky SSA sector. In times of increased uncertainty, SSAs are becoming a more attractive option for investors seeking safety.
Thursday will bring a series of economic data releases. The EU will publish trade balance and industrial production figures, providing insights into economic trends. From the US, the January jobs report will be closely watched as the labor market shows signs of cooling. November’s TIC data will offer a glimpse into foreign demand for US assets, though fears of widespread “selling America” appear to be overstated. Additional data includes the Empire Manufacturing Index and the Philadelphia Fed Business Outlook.
Spain is also scheduled to issue 3-year, 15-year, and 46-year SPGBs totaling €6 billion.
Ultimately, despite a volatile global landscape, markets are demonstrating a remarkable capacity to absorb geopolitical shocks, at least for now. The continued demand for assets, particularly in the primary market, suggests that investors are prioritizing returns and remaining cautiously optimistic.
