FA Magazine March/April 2026 | Page 46

INVESTING

Credit default swaps are financial derivative contracts, technically insurance policies against an issuer’ s failure to meet its debt obligations. In such transactions, a buyer pays the credit default swap seller for protection if the issuer does in fact default. It can be a useful telltale of broader market economic stress and turmoil.

If we look at the market reactions to certain military conflicts, including those in the Middle East, and compare them with the reaction to political events and fiscal policy decisions in France and the U. K., we can see how investors’ perception of the market’ s reaction is often skewed.

Israel And Saudi Arabia: October 2023 And June 2025

In late October of 2023, Israel’ s markets were severely affected by a surprise strike by Hamas. The contract value of the country’ s credit default swaps rose 182.17 %, while the stock market plummeted 7.55 % and the yields on government two-year bonds dropped by 9.34 % and dropped on the 10-year bonds by 3.16 %( yields move in the opposite direction of price).

Other Middle Eastern countries, like Saudi Arabia, on the other hand, did not see any appreciable instability. Saudi Arabia’ s markets stayed relatively stable despite the country’ s credit default swaps increasing by 21.11 %. Many investors are often taken aback by this; they assumed that volatility would be comparable across all countries in the region.

This implies that investors are more concerned about the sustainability of a country’ s national debt than with war. The key takeaway is that the six countries making up the Gulf Cooperation Council( Bahrain, Kuwait, Qatar, Saudi Arabia, Oman and the United Arab Emirates) did not experience a“ risk off” response.

The Hamas-Israel conflict later escalated, drawing in the United States. On Friday, June 13, 2025, Israel launched a surprise air campaign against Iran, a proxy supporter of Hamas, known as Operation Rising Lion. Iran immediately responded with retaliatory missile and drone strikes on Israel. The United States conducted its own air strikes against Iran, and the engagement reached a climax on June 21, 2025, with the U. S. launching Operation Midnight Hammer, which involved the bombing of three of Iran’ s nuclear facilities near Qom, Natanz, and Isfahan.

Investors’ response to the market seven business days after Israel’ s air campaign generated little, if any, appreciable response in the local markets. While Israel’ s credit default swaps rose 13.06 %, the stock market also happened to climb by 6.77 %, while the yields on government two-year bonds fell by 4.15 % and those on

10-year bonds rose 7.39 %. Saudi Arabia’ s financial markets experienced no change as its CDS fell by 2.19 % and its stock market rose 1.14 %.

United Kingdom: September 2022

On Friday, September 23, 2022, England’ s markets buckled when the U. K. prime minister at the time, Liz Truss, unveiled a“ mini-budget.” This included £ 45 billion($ 48 billion) in unfunded tax cuts, which would raise the government’ s estimated costs to roughly £ 161 billion($ 175 billion) over the next five years.

There was an abrupt“ risk off” reaction in the markets, and it forced an intervention by the Bank of England, which pledged to buy up to £ 65 billion($ 70 billion) worth of government bonds to stop the market’ s collapse. Seven working days following the debacle, the value of the pound declined by 8.90 % against the U. S. dollar, and credit default swaps’ contract value increased by 31.62 %, while two-year bond yields issued by the U. K. increased by 6.79 % and 10-year bonds increased by 6.92 %.

France: June 2024

European investors also got skittish in early June 2024 when French President Emmanuel Macron unexpectedly declared snap parliamentary elections. Markets responded with considerable volatility, de-

Geopolitical Event Change In Financial Markets: 7 Business Days After Event

United States Liberation Day Wed., April 2, 2025 Risk off-4.79 % 2.06 % 7.72 %-3.99 % 34.25 %

Germany

United States Presidential Election Tuesday, Nov. 5, 2024 Risk off 4.75 % 4.32 % 3.34 % 2.06 %-23.85 %

U. K. Liz Truss unveils“ Mini-Budget” Friday, Sept. 23, 2022 Risk off-1.78 % 6.79 % 6.92 %-8.90 % 31.62 % Source of market information: Bloomberg

42 | FINANCIAL ADVISOR MAGAZINE | MARCH / APRIL 2026 WWW. FA-MAG. COM