Can't see the direction, can't predict the twists! When AI disruption collides with geopolitical turmoil, how do you trade in a market with no certainty?
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As AI reshapes fundamentals and geopolitical conflicts disrupt expectations, the market is entering a phase of “unclear direction, yet forced to trade.”
According to Zhuifeng Trading Desk, on March 23rd, Bank of America Merrill Lynch released its latest "Global Equity Volatility Insights" report, pointing out that global markets are in a state of “certainty vacuum.” The report states: “When geopolitical pressure co-exists with AI disruption, the market lacks clear anchors, and investors can only rely on trading logic effective in the short term.”
This change is reshaping capital behavior and price structure. “In a low-confidence market environment, investors tend to chase momentarily effective momentum trades until they are exhausted then turn fragile.”
The report gives examples: assets with “bubble characteristics” such as the South Korean stock market, gold, and silver have experienced sharper drawdowns amid geopolitical shocks. The logic is simple: when capital is not based on fundamentals but rather on trends, once the trend reverses, the price drop becomes more severe.
Prequel of Bubble Burst: From Gold and Silver to Korean Stocks
Bank of America points out that, over the past weeks, historical turbulence in gold, silver, and Korea Composite Index (Kospi) was not accidental.
Bank of America’s “Bubble Risk Indicator” (BRI) had previously warned about bubbles in these areas. The data shows that after weeks of bubble-like behavior, gold saw a historic correction last week, forming a stark contrast with its traditional “safe haven asset” identity. Strategist Benjamin Bowler stated bluntly in the report:
“Momentum trades work until they are exhausted and become fragile, making tools like the bubble risk indicator especially useful for risk assessment.”
The volatility market currently provides the clearest signal: uncertainty is being priced to the extreme. The report shows a stunning phenomenon: VIX spot and futures levels are far above the actual volatility of the S&P 500 (20+ vs 10+), and the VIX futures curve is extremely flat despite such high volatility levels.
This combination of “high premium + flat curve” has hardly been matched in the past 20 years. This indicates the market is not only pricing a huge risk premium for geopolitical events but also is completely unable to predict when these risks will be resolved.
Deterioration of US Market Microstructure: Why Do Prices Keep Reversing?
In an environment full of uncertainty, investors have recently found that US stocks have become susceptible to “mean reversion” and intraday reversals. Bank of America analysis attributes this to policy flip-flopping, macro data swings, and deeper changes in market microstructure.
The report reveals that as the US government withdrew threats against Iran's energy infrastructure, overall market sentiment reversed by 180 degrees. The report states:
“As the market digested President Trump’s declaration of ‘temporary suspension of hostile actions in Iran,’ asset prices jumped. This again reminds us that intraday volatility captures current stock market risks better than closing volatility.”
This “rapid reversal” has led to an imbalance in market microstructure. Bank of America observes that although the S&P 500 rebounded on signals of Iran de-escalation, the share of overnight trading has risen to a high of 20%, while order book depth is shrinking. This “news-driven” rebound is prone to price overreaction, and when liquidity returns, sharp mean reversion soon follows.
“This environment makes overnight trading easily trigger price overreaction. Due to lack of liquidity support, pricing becomes very fragile. When another batch of investors returns next day and liquidity improves, the price often reverses.”
European Energy Sector: Vulnerable at the Crossroads
In European markets, geopolitical conflicts have pushed energy prices towards a crossroads but also made the European energy sector (SXEP) particularly dangerous. Despite the sector rising 27% this year, outperforming nearly all European peers, its “Bubble Risk Indicator” (BRI) reading is near the peak seen at the start of the Russia-Ukraine conflict in 2022.
Bank of America believes the European energy sector has deviated from its typical levels implied by its energy and equity beta coefficients, and positions are unusually crowded. The two possible paths for future geopolitics are both unfavorable for this sector:
- Geopolitical de-escalation: Energy prices reset lower directly.
- Conflict escalation: Extremely high energy prices will suppress global growth prospects, turning the correlation between related stocks and commodities from positive to negative.
“Under a two-way geopolitical path, we see the vulnerability of the European energy sector.”
Survival Rules Under the “Certainty Vacuum”
In a “certainty vacuum” environment, analyst Benjamin Bowler believes that investors should not blindly chase momentum but instead take advantage of structural opportunities in the volatility market. Investors should shift from seeking trends to managing volatility.
Bowler suggests: first, use VIX April put spread to bet on short-term de-escalation in geopolitical conflicts; second, use 0DTE (ultra-short-term options) to construct reversal strategies and hedge against intraday price overreaction caused by a lack of overnight liquidity; third, in Europe, conduct “cross-sector volatility hedging” by buying puts on the overheated energy sector (SXEP) while selling puts on the resources sector (SXPP), which has bottomed out in valuation.
This set of strategies aims to take advantage of dislocation in volatility pricing, protecting portfolios amid “persistent declines” and “sudden reversals,” to hedge against a potential sudden burst caused by an AI bubble.
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