Unable to see the direction clearly or predict the reversals! When AI disruption collides with geopolitical turmoil, how can one trade in a market with no certainty?

Ask AI · Why Do Geopolitical Turmoil and the AI Revolution Together Create a Market “Certainty Vacuum”?

As AI reshapes fundamentals and geopolitical conflicts disrupt expectations, the market is moving into a phase of “unclear direction, yet you have to trade.”

According to a report from the Pursuit the Wind Trading Desk, on March 23, Bank of America Merrill Lynch released its latest report, Global Stock Volatility Insights, noting that global markets are in a state of “a certainty vacuum.” The report wrote: “When local geopolitical pressure and AI disruption coexist, the market lacks clear anchors, and investors can only rely on short-term effective trading logic.”

And this change is reshaping capital behavior and price structure. “In a low-confidence market environment, investors tend to chase momentum trading that works in the moment—until it runs out and turns fragile.”

The report cites examples: assets such as the Korean stock market, gold, and silver—previously characterized by “bubble-like features”—saw larger drawdowns during geopolitical shocks. The logic is simple: when capital is not based on fundamentals but on trends, once the trend reverses, price declines become more severe.

A dress rehearsal for a bubble bursting: from gold and silver to Korean stocks

Bank of America pointed out that over the past few weeks, the historical-level turbulence seen in gold, silver, and the Korea Composite Index (Kospi) was not a coincidence.

Bank of America’s “Bubble Risk Indicator” (BRI) previously warned of bubble risk in these areas. The data shows that after weeks of bubble-like behavior, gold saw a historical pullback last week—sharply contrasting with its traditional identity as a “safe-haven asset.” In the report, strategist Benjamin Bowler said bluntly:

“Momentum trading has worked until it exhausts and falls into fragility, which makes tools like bubble risk indicators especially useful for assessing risk.”

At present, the volatility market provides the clearest signal: uncertainty is being priced to the extreme. The report shows a striking phenomenon: both spot and futures levels of VIX are far above the S&P 500’s realized volatility (20+ vs 10+), and the VIX futures curve appears unusually flat even at such high volatility levels.

This combination of “high premium + flat curve” has had almost no close analogues in the past 20 years. This suggests that the market is not only assigning a huge risk premium for geopolitical events, but also that it cannot forecast when the risk will be resolved at all.

U.S. stock microstructure deteriorates: Why do prices always reverse?

In a market full of uncertainty, investors have recently found that U.S. stocks have become highly prone to “mean reversion” and intraday reversals. Bank of America believes this is attributable to policy flip-flopping, oscillations in macro data, and deeper changes in the market’s microstructure.

The report discloses that as the U.S. government withdrew its threats regarding Iran’s energy infrastructure, market sentiment flipped 180 degrees. The report said:

“As the market priced in President Trump’s statement about ‘a temporary pause in hostile actions against Iran,’ asset prices jumped higher accordingly. This once again reminds us that intraday volatility captures current stock market risk better than closing volatility.”

And this “rapid reversal” leads to imbalances in market microstructure. Bank of America observed that although the S&P 500 rebounded due to signals of de-escalation with Iran, because the overnight trading volume share has risen to a high level of 20%, while order book depth has been shrinking, this kind of “news-driven” rebound can easily cause overreaction in prices—and then, when liquidity returns, it often results in sharp mean reversion.

“This environment makes it easy for overnight trading to trigger price overreactions; due to a lack of liquidity support, this pricing becomes very fragile. When another batch of investors returns the next day and liquidity improves, prices often reverse.”

European energy sector: the fragile at the crossroads

In European markets, geopolitical conflicts have pushed energy prices to a fork in the road, but they also make Europe’s energy sector (SXEP) especially dangerous. Although the sector is up 27% since the start of this year, outperforming almost all other European peers, its “Bubble Risk Indicator” (BRI) reading is already near the peak from the early stage of the 2022 Russia-Ukraine conflict.

Bank of America believes that the European energy sector is currently already detached from the levels implied by its typical energy-and-stock-market beta and that positioning is unusually crowded. Two possible paths for the geopolitical situation ahead are both unfavorable for this sector:

• Geopolitical cooling: Energy prices reset directly lower.

• Conflict escalation: Extremely high energy prices will in turn suppress global growth prospects, causing the correlation between related stocks and commodities to turn from positive to negative.

“Under two-way geopolitical paths, we’ve seen the fragility of the European energy sector.”

Survival rules under a “certainty vacuum”

Under a “certainty vacuum” environment, analyst Benjamin Bowler believes that investors should not blindly chase momentum, but instead use structural opportunities in the volatility market. Investors should shift from finding trends to managing volatility.

Bowler suggests: first, use a VIX April put spread to play the short-term de-escalation of geopolitical conflict; second, use 0DTE (ultra-short-dated options) to build reversal strategies to hedge intraday price overreactions caused by the lack of overnight liquidity; third, in the European market, conduct “cross-sector volatility hedging”—buy put options on an overheated energy sector (SXEP) while selling put options on a resource sector (SXPP) whose valuation has hit the bottom.

This set of coordinated moves aims to protect the investment portfolio amid “grinding declines” and “sudden reversals” by exploiting the disconnect in volatility pricing, and to hedge against the sudden rupture that a potential AI bubble burst could bring.