Geopolitical risks could hit markets if tensions escalate, says Report

New Delhi [India], January 21 (ANI): Even as shifting geopolitical dynamics with flashpoints of Venezuela, Greenland, and Iran have taken centre stage of the world's focus in 2026, market reactions have remained fairly muted with global equities, rates and FX remaining stable. Only gold and oil briefly reached highs of +7% and +8%, respectively, year-to-date (YTD), reflecting investor uneasiness and rising probabilities of downside scenarios, according to a report by Allianz.
The report titled "Geopolitics heats up from Venezuela, to Greenland to Iran, but investors shrug. For how long?" discusses how geopolitical tensions worldwide can impact markets.
"We anticipate two tail-risk events that could trigger a strong global market reaction: 1) an escalation in the Middle East, where higher oil prices could push the world back toward stagflation, and 2) a forceful annexation of Greenland by the US, which would have repercussions for NATO, trade and the Ukraine conflict," the report noted.
A resulting global one-standard-deviation confidence shock, a severity roughly midway between the Covid and Liberation Day shock, would reduce global GDP growth by approximately 1pp (from 2.9% in 2026) and trigger severe market disruptions, including falling equities (except defence), widening credit spreads, steeper yield curves, a weaker euro and stronger gold.
The growing instability in South America, especially Venezuela, would lead to a "negative global market reaction" due to increased uncertainty. "Multiple security crises and trade disruption trigger capital outflows, supply-chain breaks and confidence shocks, cutting regional growth by +0.5pp and lifting CPI by +2-3pps," the report indicated.
Another expected scenario that the report reflects on is the heightened scrutiny, political uncertainty and limited business confidence in South America accompanied with subdued investment, moderate inflation pressures and near-steady growth. FDI-driven realignment and cooperation could accelerate infrastructure and trade, adding +0.5pp to regional growth in 2026-2027 with stable commodities and neutral CPI.
However, if more US interventions follow, a downside scenario could unfold, triggering a GDP contraction by -0.5pp.
Another unexpected flashpoint is Greenland, where the U.S. administration has stepped up "annexation threats". While a "forceful annexation" is considered unlikely, such an event would "end NATO overnight" and "demolish the Western alliance". Allianz expects the U.S. will eventually "tone down its rhetoric" and focus on peaceful cooperation with allies to secure its strategic interests in the Arctic.
The report also talks about a scenario where US gains de facto control via economic, political and security leverage short of annexation. In this case also the markets are expected to remain muted as purely political sphere with no trade or supply-chain implication.
However, if the US decides to seize Greenland by force to secure direct territorial control, the markets will see severe risk-off moves. Deflationary recession global equities could plummet (excluding defense). Europe also could underperform given the increased risk premium stemming from the proximity to Russia. Rates will be expected to drop globally but even more in Europe as the ECB would ease policy to fight a deflationary recession.
One major area of concern is the Middle East, specifically the ongoing instability in Iran. The report notes that "a significant risk would be an all-out war" involving the U.S. military, which could send oil prices soaring to "120 USD/bbl" and trigger a "negative reaction in the global market". Despite these fears, the report suggests that "regime continuity" remains the most likely path for Iran in the near term, even as a "once-in-a-generation protest movement" continues to challenge the current leadership. (ANI)