Russian drones crossed into Ukraine, marking the first time they had to be shot down. Poland reacted, becoming the first NATO country to get involved since the conflict began in 2022. Poland called the drone incursion an “unprecedented violation” of its airspace and took defensive actions. Increased drone activity near borders has led Polish fighter jets to respond multiple times recently.

Vulnerable Regions Identified

Polish armed forces have identified three areas that could be at risk if tensions rise. Despite this, European markets have stayed calm. Equity futures are up, and the FX market is stable as traders focus on US data this week. Gold remains attractive amid ongoing geopolitical issues. After hitting record highs, it rose another 0.5% today to $3,643, even after some profit-taking yesterday. The current calm in the market, following the downing of Russian drones in Poland, presents a crucial opportunity. This direct action by a NATO member represents a significant escalation that the market has not yet adjusted for. We should prepare for increased volatility, similar to when the VIX index jumped above 35 in the early weeks of the conflict in 2022.

Impact on European Equities

European equities appear particularly at risk due to this new development. Further escalations could seriously affect the regional economy and investor sentiment. Buying put options on indices like the German DAX is a straightforward way to protect against this risk, recalling its over 10% decline in the weeks after the initial invasion. In currency markets, we anticipate a classic flight to safety, usually benefiting the US dollar and the Swiss franc. The euro is likely to weaken as the risk premium shifts to Europe. This mirrors the situation in 2022, when the EUR/USD pair fell below parity for the first time in two decades due to concerns about the economy linked to the war. Energy prices are now on high alert for potential supply disruptions. A direct clash involving a NATO member could compromise key Russian oil and gas export routes. Thus, we should consider taking long positions in crude oil and natural gas futures to benefit from a possible price spike. Gold will likely continue its rise as the ultimate safe-haven asset. The recent jump to $3,643 an ounce may just be the beginning if tensions keep escalating. We view holding call options on gold as a key strategy to profit from increasing geopolitical uncertainty. Create your live VT Markets account and start trading now.

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