12 May 2025
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Banks, markets, analysts - basically anyone with skin in the game - have all warned that a world filled with conflict isn’t one where investors should feel at ease. But after a weekend of news, are we about to give peace a chance?
The markets certainly like to hear that big new military deals have been announced. Whether it’s the announcement of the now-in-service F35 Lightning jets, the announcement of the AUKUS submarine deal or even the rumblings out of the European Union that more money should go into defensive (and offensive) equipment.
What markets don’t seem to like is when those weapons actually have to be used. Whether it's in Gaza, Ukraine or in Kashmir, the sound of military boots on the ground brings with it market moves due to uncertainty.
Before we get into how conflict affects markets, let’s go around the grounds as it were to see where we are with the conflicts currently in play. We might be about to see multiple ceasefires come all at once.
Gaza has been levelled as part of Israel’s campaign to rid the region of Hamas. After Israel declared war on Hamas back in 2023, the death toll has been catastrophic, including many women and children. The Israeli response has included a ground war, a blockade and a number of airstrikes on suspected Hamas targets.
At the time of writing, Hamas still holds a number of hostages following its attack on Israel in October 2023. Today, however, good news: Hamas declared it would hand over its final US-Israeli hostage, 21-year old Edan Alexander.
The US-brokered agreement to hand over Alexander is designed as a gesture of goodwill (or so Egypt and Qatar put it in a statement) to keep Israel at the negotiating table for a future ceasefire and (hopefully) a cessation of hostilities.
We have already seen Israel march its way back into Gaza after one ceasefire deal fell apart. This writer hopes that it’s different going forward for the sake of the people of Gaza.
Moving north-east now.
After a terror attack in the Indian-administered Kashmir region that killed 28 civilians, India and Pakistan have once again been at each other’s proverbial throats over the disputed territory. India has levelled blame squarely at Pakistan for the attack, launching airstrikes in the region in early-May. Pakistan responded in kind, launching drone and missile attacks of its own on Indian cities - including New Delhi.
Hostilities between these two powers are nothing new, but world leaders and markets are naturally wary when two nuclear-capable nations start expressing their disagreements kinetically.
The conflict got so out of hand that the Indian Premier League cricket tournament had to be postponed as players fled the country. The Aussie contingent reportedly narrowly escaped a missile strike in Pakistan, for example.
The US has since stepped in to negotiate a ceasefire which went into effect on 10 May. However, tensions in the area - as always - are still high.
An invasion that was meant by its aggressors to be swift has now dragged on into a conflict that has resulted in the devastation of Ukraine and a catastrophic loss of life. However, the conflict could now be on the verge of - at the very least - an actual ceasefire.
May has seen negotiations between the US, Ukraine and Russia step up, with Vladimir Putin finally signalling he’s ready to meet Ukraine president Volodymyr Zelenskyy face-to-face for discussions on the conflict.
Discussions held at arm’s length between the two parties in recent months have seen Russia place many demands on Ukraine in exchange for a ceasefire. This includes the potential surrender of now-occupied Ukrainian territory to Russia, and pledges from the former that it will give up its campaign to join the European Union.
US President Donald Trump has meanwhile experienced his own form of hostility with Ukraine in the Oval Office that was broadcast to the world. Following the exchange, Ukraine has since signed a rare earth minerals deal with the US ex-parte to the conflict.
Hostilities continue in the interim, however.
Unlike the other conflicts mentioned on this list which are physical, the US is currently waging an economic war on the world thanks to Trump’s “Liberation Day” reciprocal tariffs. Although they’re currently on pause (unless you’re China), the uncertainty they bring to the market continues to linger.
When Trump announced the tariffs on April 2, the market responded with one of the largest drops since COVID. Since then, investors and companies all over the world have been limiting their exposure to US markets.
Trump and his team have seemingly spent the time since announcing the pause to shore up free-trade deals (or at least better trade deals) with international partners. We’ve already seen an agreement-in-principal with the UK, and talks with China in Switzerland seem to be going well too with some movement overnight towards a compromise.
Could we see economic peace in our time as well a wind-down of more explosive conflicts?
These conflicts have all brought with them the hallmarks of investor concern. Because if there’s one thing markets hate more than anything, it’s uncertainty.
The CBOE Volatility Index (VIX) - a measure of S&P 500 options pricing - has demonstrated a response to these conflicts categorised by significant investor skittishness.
Put simply, when the VIX index goes up, investors are typically moving away from equities and into safer assets like gold or bonds. An upward push in the index is usually triggered by world news that brings with it disruption and uncertainty.
While the index only tracks the S&P 500, we’ve seen the local Australian markets respond in kind with portfolio owners shifting their holdings from international equities into bank stocks, driving CBA - in particular - to a new record-high.
On a day where nobody's making any loud noises, typical numbers for VIX range between 10 and 20. But on days of big news, VIX spikes.
In October 2023 when the Israel-Gaza situation developed into conflict, VIX went to around 25 over oil fears in the region. When Russia first invaded Ukraine in February 2022, VIX jumped to 36 over - again - oil concerns, but also over European supplies of gas and Ukrainian agriculture exports to the rest of the world (or lack thereof).
The sell-off following Trump’s April 2025 tariff announcement spiked VIX to over 50. But these upward reports haven’t been historic highs for VIX. Not by any means. Anything above 50 is considered time to panic, and at the height of the GFC in 2008, for example, VIX spiked to 80. COVID-19 lockdowns forced it even higher to 85.
VIX has simmered significantly since April 8 when it reached Trump-driven highs not seen since the pandemic.
At the time of writing, VIX is sitting at an almost-docile 21.9. It’s down from its staggering highs following Liberation Day, and even further down from a bracing rate of 33 back on April 21. You may remember that date for two reasons. First, it saw the death of a Pope, and a discussion that accidentally saw a journalist added into a high-ranking military chat regarding operations in Yemen and the Red Sea.
So if you turn on the news one day and see something that catches your concern, check VIX to see if you’re not the only one feeling a little concerned.
Here’s to peace in our time.
