As we enter week four of the war with Iran, geopolitics is still driving the headlines — and markets. The more useful question now isn’t “what happens next?” but how much stress is already in the price and how the risk/reward is shifting. I like to think about this on two layers: geopolitical stress and market stress.
On the geopolitical side, we got the “buy the risk premium” signal almost immediately. The Geopolitical Risk Index (GPR) spiked to 565 — miles above the historical buy threshold at 300 — and it has stayed above 300 on most days since the war began. But the pattern is also familiar: unless there’s escalation, people adapt. Even a bad situation becomes the new normal and the GPR tends to drift lower over time. Ukraine is a good recent example.
Market stress, by contrast, has been building more slowly. A lot of indicators have shifted in a bearish direction, but it’s still hard to argue sentiment is extremely bearish. My best guess is we’d need another high-volume, big down day to push a broader set of risk-on/risk-off indicators into clear investor bearishness.
Against that backdrop, our Risk-on / Risk-off Sentiment Matters Aggregate has dropped to 52 — the lowest level in eight months. That’s a long way from the bullish peak at the five-year high in January, but it’s also still far from the historical “buy” zone around 30, last reached in the Liberation Day sell-off.
In fast-moving markets, high-frequency indicators matter more than aggregates — because aggregates, by definition, react more slowly. The VIX (around 30 as I write) is closing in on its historical buy threshold of 35. One more bad day could easily take it there or beyond. In Europe, VSTOXX tells a similar story: at 36, it’s close but not yet at the historical buy threshold of 42. In some markets, implied volatility is already beyond those thresholds (e.g., parts of Asia like South Korea and Japan).
One important point on implied vol: its track record works best over a 12-month horizon. It tells you very little about the next few weeks — but market stress rarely stays elevated for long, which is why the odds of above-average returns start to tilt in your favour once these measures hit extremes.
Top 3 This Week
- Sentiment: Bearish — but not yet extreme.
- Oil / Energy: Bullish sentiment + the new AI GPR on oil disruptions + the mean-reversion nature of the geopolitical risk premium argue for caution from a sentiment perspective.
- Japan vs Europe: Big preference shift toward Japan and away from Europe. Neither is extreme yet, but it highlights where “buy-the-dip” activity could focus if we get there.
Sentiment Overview
- Big picture: most bearish in eight months, with the average indicator close to the 50th percentile — but still far from a clean aggregate “buy signal.”