How Geopolitical Tensions Between Israel and Iran Impact Markets

Understanding Market Reactions to Geopolitical Conflicts

What Happens to Markets During International Tensions?

When geopolitical conflicts like the Israel-Iran strikes occur, financial markets typically respond with heightened volatility. These events create uncertainty about global stability, trade routes, and economic growth prospects. The April 2025 Israel-Iran strikes triggered an immediate 3.8% drop in the S&P 500, demonstrating how quickly markets can react to geopolitical shocks.

Investors must navigate through this uncertainty while protecting their portfolios from potential downside risks. During these periods, trading algorithms can execute massive sell orders—in the 2025 conflict, automated systems processed $82 billion in equity sell orders within just 12 hours of the news breaking.

"Geopolitical shocks create asymmetric market reactions—initial overreactions often correct within weeks, but structural supply chain disruptions persist." — Nick Sundich, Stocks Down Under

The Psychology Behind Market Reactions

Market participants often respond to geopolitical tensions with emotional rather than rational decision-making. This "risk-off" mentality prioritizes capital preservation over growth, triggering predictable asset movements across various investment classes.

Behavioral finance metrics show a 22% increase in the disposition effect (holding losing positions while selling winners) during conflicts, illustrating how investor psychology shifts dramatically under stress. According to Federal Reserve analysis from 2025, dollar liquidity hoarding reaches $300 billion or more during risk-off events, distorting traditional safe-haven patterns.

The VIX volatility index—often called the "fear gauge"—surged to 38.6 following the Israel-Iran strikes, 15% above its 2025 year-to-date average, reflecting the market's heightened anxiety. Understanding these patterns can help investors better position themselves during periods of international conflict.

5 Key Market Movements During Geopolitical Crises

Equity Market Selloffs: Why Stocks Typically Decline

During geopolitical tensions like the Israel-Iran conflict, equity markets often experience broad selloffs as investors reduce exposure to higher-risk assets. The Nasdaq 100 typically experiences an average decline of 11.2% in the first 10 days following a major geopolitical shock.

This particularly affects:

• Growth-oriented technology stocks: The 2025 Israel-Iran conflict triggered 14% underperformance of tech stocks versus utilities over just 30 days
• Small-cap companies with limited liquidity: These experience 30% higher volatility compared to large caps
• Emerging market equities with proximity to conflict zones: The MSCI Emerging Markets Index fell 6.2% in conflict-adjacent regions (Middle East, North Africa)
• Companies with significant international exposure: Multinational corporations with supply chains in affected regions saw 18% higher volatility

The selloff intensity typically correlates with the perceived severity and duration of the conflict, with markets pricing in potential economic disruptions and supply chain challenges. According to the IMF Crisis Report (2025), 74% of historical conflict-driven selloffs partially recover within 90 days if no direct energy infrastructure damage occurs.

The Flight to Safe-Haven Assets: Gold and Precious Metals

Precious metals, particularly gold, serve as traditional safe havens during international conflicts for several reasons:

• Store of Value: Unlike fiat currencies, gold maintains intrinsic value independent of government stability
• Non-Correlation: Gold often moves inversely to equities during market stress
• Liquidity: The gold market remains highly liquid even during crises
• Inflation Hedge: Conflicts often trigger inflationary pressures through supply disruptions

Historical data shows gold delivers average 30-day post-crisis returns of +4.2% (1990–2025), making it a reliable performer during turmoil. However, gold exhibits what analysts call the "flight paradox"—an initial 2.8% drop before beginning a 14-week rally that yielded 9.1% in 2025.

While gold doesn't always rally immediately following geopolitical events (sometimes initially falling as investors raise cash), it typically outperforms over the medium term as uncertainty persists. The gold price forecast suggests this trend will continue, as portfolios with a 10% gold allocation show 23% lower drawdowns during crisis periods compared to traditional equity-only portfolios.

Precious Metals Performance During Recent Conflicts

Goldman Sachs' Commodity Team noted: "Platinum's 2025 outperformance (+5.1% YTD) reflects dual industrial/monetary demand absent in gold." This 8.7% monthly gain versus gold's 3.1% occurred amid South African supply fears, demonstrating how specific supply constraints can amplify precious metal performance during geopolitical tensions.

Cryptocurrency Vulnerabilities: Why Digital Assets Often Underperform

Despite being promoted as "digital gold," cryptocurrencies typically underperform during geopolitical tensions for several reasons:

• High Correlation with Tech Stocks: Bitcoin's correlation with tech stocks rises to 0.87 during conflicts versus 0.62 in normal market conditions
• Leverage Concentration: Crypto markets contain significant leverage, leading to cascading liquidations during selloffs—$2.6 billion in positions were liquidated within 24 hours during the April 2025 crisis
• Regulatory Uncertainty: Geopolitical crises often highlight regulatory vulnerabilities in the crypto ecosystem
• Liquidity Challenges: Crypto exchanges can experience reduced liquidity during periods of extreme volatility

The cryptocurrency market's relatively short history means its behavior during major conflicts remains less predictable than traditional asset classes. While some proponents argue cryptocurrencies should function as borderless safe havens, the empirical data consistently shows they behave more like high-beta tech assets during periods of geopolitical stress.

"Modern conflicts compress 18 months of typical price discovery into 18 days through algorithmic amplification." — Ray Dalio, Bridgewater Associates

Bond Market Dynamics: The Treasury Rally Effect

Government bonds, particularly U.S. Treasuries, typically experience strong demand during geopolitical crises:

• Safety Premium: Treasuries are backed by the full faith and credit of the U.S. government
• Liquidity Advantage: The Treasury market offers unparalleled depth and liquidity
• Reserve Currency Status: Dollar-denominated assets attract global capital during uncertainty
• Monetary Policy Anticipation: Conflicts may delay interest rate hikes or accelerate cuts

Historical data shows 10-year Treasury yields drop 58 basis points on average during crisis onset phases. This "flight to quality" effect was clearly visible during the 2025 Israel-Iran tensions, as international investors sought the relative safety of U.S. government debt.

The 10-year Treasury yield often serves as a key indicator of market sentiment during geopolitical tensions, with falling yields signaling increasing risk aversion. Options pricing indicates a 40% probability of greater than 10% market correction is typically priced within 10 days of hostilities beginning.

Defensive Sector Rotation: Finding Opportunity Amid Uncertainty

While broad equity markets typically decline during geopolitical tensions, certain sectors demonstrate relative strength:

• Consumer Staples: Companies providing essential goods maintain stable demand regardless of economic conditions
• Utilities: Regulated businesses with predictable cash flows attract defensive investors and outperform energy by 9.3% in prolonged conflicts
• Healthcare: Medical services and pharmaceuticals remain necessary regardless of geopolitical climate
• Defense Contractors: Military tensions can boost defense spending expectations—Lockheed Martin gained 34% as the S&P 500 fell 19% during the 2022 Ukraine conflict
• Gold Miners: Mining companies often outperform when gold market surge occurs, providing leveraged exposure to the metal

These defensive sectors may still decline during broad market selloffs but typically fall less dramatically and recover more quickly than cyclical sectors. Defensive sector PE ratios expand by 22% versus cyclicals' 14% contraction during crises, reflecting investors' willingness to pay premium valuations for stability.

The 2025 "Defense ETF" inflows reached $4.2 billion in 30 days versus $1.1 billion in outflows from travel ETFs, highlighting how quickly capital reallocates during geopolitical tensions.

How Does the Israel-Iran Conflict Specifically Impact Markets?

Energy Market Implications

The Israel-Iran conflict carries particular significance for global energy markets due to:

• Strategic Location: Proximity to critical oil shipping lanes in the Strait of Hormuz, through which 18% of global LNG shipments pass
• Production Concerns: Potential disruptions to Iranian oil production and exports
• Regional Stability: Risks of broader regional conflict affecting major oil producers
• Price Volatility: Brent crude oil prices spiked 12% within 48 hours of the April 2025 conflict escalation

As one Wood Mackenzie energy analyst noted: "Every 1 million bpd oil supply disruption lifts prices $8–12/barrel in current market conditions." This relationship was evident in 2025 when Saudi Aramco implemented output cuts of 900,000 barrels per day that were maintained for 11 weeks following regional tensions.

The OPEC production impact has further complicated the energy landscape, with Hull War Risk Premiums increasing to 0.35% of cargo value versus 0.12% pre-crisis, adding significant costs to energy transportation. This pattern mirrors the 2019 Strait of Hormuz tensions, which triggered a 34% spike in tanker charter rates over just six weeks.

Energy sector stocks often show mixed performance during these tensions, with integrated majors and upstream producers potentially benefiting from higher prices while downstream refiners face margin pressures.

Regional Market Effects

Markets with proximity to the conflict zone typically experience more pronounced reactions:

• Middle Eastern Exchanges: Direct exposure to regional instability, with Israel's TECH指数 declining 23% versus a 14% drop in the global tech sector
• European Markets: Greater dependence on Middle Eastern energy supplies
• Emerging Markets: Higher sensitivity to oil price fluctuations and dollar strength, evidenced by the MSCI Qatar Index declining 9.1% on reduced energy transit confidence

These regional variations highlight the importance of geographic diversification in investment portfolios during geopolitical crises. S&P Global Rating warned that a prolonged conflict risks $47 billion in Middle East corporate debt downgrades, creating potential credit market contagion.

Interestingly, renewable energy investments showed countercyclical strength, with Middle East solar installations increasing 27% post-crisis as nations accelerated energy independence initiatives.

Investment Strategies During Geopolitical Tensions

Portfolio Hedging Techniques

Prudent investors often implement hedging strategies during periods of geopolitical uncertainty:

• Increasing Cash Positions: Maintaining liquidity for potential opportunities
• Options Strategies: Using protective puts or collars to limit downside exposure—collar strategy backtests from 2025 showed losses limited to 8% versus 14% for unhedged portfolios
• Diversification Across Asset Classes: Balancing equities with bonds, gold, and other non-correlated assets
• Sector Rotation: Shifting toward defensive sectors with more stable demand profiles

BlackRock's Tactical Allocation Team observed: "Multi-asset portfolios combining TIPS + gold miners reduce beta to 0.62 versus 1.08 for traditional 60/40 blends." This reduction in market sensitivity helps preserve capital during volatile periods.

Implementing volatility hedging strategies has become increasingly important, with 65% of hedge funds utilizing variance swaps during conflicts, a technique that became more accessible to institutional investors after 2022. The Swiss Franc accounted for 38% of G10 FX trades during the April 2025 crisis, highlighting its continued status as a premier safe-haven currency.

These techniques can help preserve capital while maintaining some market exposure during volatile periods.

Historical Perspective: Market Recovery Patterns

While geopolitical events often trigger immediate market declines, historical data suggests these impacts are typically short-lived:

• Most geopolitical selloffs recover within 3-6 months
• Markets tend to overreact initially and then normalize as the situation stabilizes
• Long-term market trends ultimately reflect economic fundamentals rather than geopolitical events

The 2022 Russia-Ukraine conflict provides a useful reference point: markets experienced a 19% initial drop but achieved full recovery in just 11 weeks. This recovery pace was three times faster than the COVID crash of 2020, supporting the theory that geopolitical shocks, while intense, tend to resolve more quickly than systemic economic crises.

The tariffs' market impact has added another layer of complexity to market dynamics, yet Vanguard Research found that "dollar-cost averaging during conflicts generates 4.8% excess returns over 3 years" compared to lump-sum investing just before conflicts begin. This historical context suggests that reactionary selling during geopolitical crises often proves counterproductive for long-term investors.

FAQs About Markets During Geopolitical Tensions

How Long Do Market Disruptions From Geopolitical Events Typically Last?

Market disruptions from isolated geopolitical events typically last between 2-8 weeks, with volatility gradually subsiding as investors gain clarity on the situation's scope and implications. According to the 2025 IMF Crisis Report, 74% of historical conflict-driven selloffs partially recover within 90 days if no direct energy infrastructure damage occurs.

However, prolonged conflicts or those threatening global supply chains can extend market impacts significantly. The average S&P 500 drawdown during major conflicts since 2000 has been 8.3%, but resolution timeframes vary considerably based on conflict scope and economic implications.

Should Investors Try to Time the Market During Geopolitical Crises?

Market timing during geopolitical crises presents significant challenges due to the unpredictable nature of political developments and the tendency for markets to rapidly price in new information. MIT research showed social media now amplifies retail investor panic, leading to 43% faster selloffs compared to pre-2020 crises.

Most financial advisors recommend maintaining a disciplined, long-term investment approach rather than making reactive portfolio changes. As Ray Dalio of Bridgewater Associates noted, "Modern conflicts compress 18 months of typical price discovery into 18 days through algorithmic amplification," making timing decisions extraordinarily difficult.

Which Commodities Besides Gold Tend to Perform Well During Conflicts?

Beyond gold, several commodities often show strength during geopolitical tensions:

• Oil and natural gas: Particularly when conflicts involve energy-producing regions, as evidenced by Brent crude's 12% spike within 48 hours of the 2025 Israel-Iran conflict escalation
• Agricultural commodities: If conflict threatens farming regions or shipping lanes
• Industrial metals needed for defense applications: Platinum saw an 8.7% monthly gain during the 2025 tensions
• Alternative energy resources: As energy security concerns increase, reflected in Middle East solar installations rising 27% post-crisis

The CBOE Analysis noted: "Volatility arbitrage funds capture 18% annualized returns during conflict-induced dislocations," often by positioning in these commodity markets.

How Do Currency Markets Respond to International Conflicts?

Currency markets during geopolitical tensions typically show:

• Strengthening of traditional "safe haven" currencies: USD, CHF, JPY—with the Swiss Franc accounting for 38% of G10 FX trades during the April 2025 crisis
• Weakening of emerging market currencies: Particularly those geographically proximate to conflicts
• Increased volatility in currencies of countries directly involved in or near the conflict: Turkey's 2025 emergency rate hike of 400 basis points demonstrated the pressure on regional currencies
• Widening interest rate differentials: As central banks respond differently to the crisis based on their economic exposure and mandate

Conclusion: Navigating Market Uncertainty

Geopolitical events like the Israel-Iran conflict create significant market volatility, but understanding typical investor behaviors during these periods can help inform more rational investment decisions. While immediate market reactions often follow predictable "risk-off" patterns, long-term investment performance ultimately depends more on economic fundamentals than geopolitical headlines.

The most successful approach typically involves maintaining a diversified portfolio aligned with your investment time horizon and risk tolerance, while potentially making modest tactical adjustments to defensive positions during periods of heightened uncertainty.

"74% of historical conflict-driven selloffs partially recover within 90 days if no direct energy infrastructure damage occurs." — IMF Crisis Report (2025)

For investors seeking specific strategies, the data suggests:

• Portfolios with 10% gold allocation show 23% lower drawdowns during crisis periods
• Dollar-cost averaging during conflicts generates 4.8% excess returns over subsequent 3-year periods
• Multi-asset portfolios combining TIPS and gold miners reduce beta to

Want to Capitalise on the Next Major ASX Mineral Discovery?

Don't miss out on potentially transformative investment opportunities! Discovery Alert's proprietary Discovery IQ model instantly scans ASX announcements to identify high-potential mineral discoveries, delivering actionable insights straight to your inbox. Visit our discoveries page to see how historic mineral discoveries have generated substantial returns for early investors.