Key Takeaways
Despite the US action to blockade the Strait of Hormuz, the stock market reaction has been relatively muted. Analysts suggest investors are increasingly viewing this geopolitical shock as a temporary event rather than a long-term market driver. Risks to the Strait of Hormuz, which handles one-fifth of global oil shipments, have heightened inflation and supply chain concerns.
The US move to blockade the critical Strait of Hormuz triggered a familiar market chain reaction: a spike in crude oil prices, rising Treasury yields, and a stronger US dollar. This time, however, the overall market reaction has been notably restrained outside of oil prices. Stock market declines on Monday were relatively moderate, indicating that investors have largely priced in the geopolitical risks and have become less sensitive to related news. Commenting on the announcement, Billy Leung, Investment Strategist at Global X ETFs, stated, "The market views this largely as a negotiation tactic. Uncertainty has peaked, and the market reaction is no longer as extreme as before." Asian equities broadly declined, but the losses were significantly milder, with most major indices down around 1%. Futures for major US stock indices also fell by less than 1%. Spot gold fell approximately 0.5% to $1,720.28 per ounce, while the US Dollar Index rose 0.38%. A stronger dollar makes gold, priced in USD, more expensive for holders of other currencies, thereby reducing its appeal. Leung noted that recent market movements show investors have become more accustomed to geopolitical shocks, with volatility easing compared to previous weeks. "I think the market now has a more reasonable pricing and clearer understanding of the motivations behind the actions." Similarly, Jun Bei Liu, Lead Portfolio Manager at Tribeca Investment Partners, pointed out that volatility indicators suggest the peak fear period may be over. "We saw the VIX fear index move higher a few weeks ago; that was likely the peak of fear and selling... From here, the market will gradually heal itself." However, a key short-term risk lies in the political timeline corresponding to US military action. Leung mentioned the War Powers Resolution, which effectively limits the window for government action without congressional approval. "The sense of urgency for the administration will increase over the coming weeks," he said, adding that the market may not yet fully appreciate this constraint. Reports indicate that US lawmakers are making another attempt to pass a resolution aimed at preventing conflict with Iran and forcing the administration to seek congressional approval before launching further strikes.
Oil Prices Expected to Recede, Equities Poised for Rebound Shipping through the Strait of Hormuz has nearly stalled since the conflict began, and the US blockade has further fueled expectations of tightening energy supplies, pushing crude prices higher and sparking global inflation concerns. Inflation worries have also disrupted expectations for interest rate cuts, driving Treasury yields higher alongside a stronger dollar and lower equity prices. The yield on the 10-year US Treasury note has risen more than 33 basis points since the conflict began, while the US Dollar Index has gained approximately 1.4% over the same period. US oil prices have surged over 55% since the conflict erupted. As of 10:50 PM ET, US crude futures for May delivery were up over 8% at $104.93 per barrel; the international benchmark, June Brent crude, rose 7% to $102.17. Analysts anticipate that oil prices will ultimately recede as the geopolitical situation stabilows, even if short-term volatility persists. Michael Yoshikami of Destination Wealth Management expressed confidence, stating, "I am quite convinced oil prices will pull back from here... We will see $80 per barrel oil again." He believes the US and Iran will ultimately reach a negotiated solution, which could quickly remove the current risk premium. Steve Brice from Standard Chartered noted that higher oil prices delay the arrival of accommodative monetary policy, putting upward pressure on Treasury yields and the US dollar. "But we view these as temporary phenomena because we believe the US is seeking ways to de-escalate the situation." Gold's performance has been somewhat anomalous, declining despite heightened geopolitical tensions. Brice attributed this to emerging market central banks selling gold to stabilize their local currencies but believes gold demand will return if Middle East tensions ease. For now, the market appears to be balancing high geopolitical risks against the expectation that conflict will eventually de-escalate, having also become somewhat immune to statements from the administration. Brice stated, "We believe equity positioning is conducive to a rebound, so as long as the situation does not deteriorate significantly, equities should continue to recover in the near term." He added that even with a relatively positive macro backdrop, investors remain in defensive positions, suggesting room for a market rally if tensions begin to subside. This creates a nuanced environment for investors: geopolitical shocks still have an impact but no longer trigger the panic selling seen in the initial stages of the conflict. Yoshikami concluded, "The outcome is no longer black and white; the market will be in a grey area for some time to come."
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