The Middle East conflict has now persisted for four weeks, with opposing parties transitioning from direct confrontation to initial engagement through third-party mediation. Financial markets have exhibited a pronounced headline effect when confronted with the unpredictable and nonlinear progression of geopolitical tensions. Pricing mechanisms have temporarily shifted from long-term narratives to immediate, often exaggerated, and reversible reactions to breaking news. The speed of liquidity transfers across different markets has accelerated.
Over the past four weeks, encompassing 25 trading days, market performance has been varied. First, the S&P 500 index recorded gains on only 7 days, while South Korea's KOSPI index rose on 11 days (with one market holiday). Second, the 10-year U.S. Treasury note saw price increases on just 6 days, and international gold prices also advanced on only 6 days. Third, Brent crude futures rose on 16 days, and the U.S. Dollar Index climbed on 13 days.
Analyzing these market movements reveals that since the conflict began, pricing logic has centered on the surge in energy prices and the resultant cross-market liquidity shifts. Firstly, based on 2024-2025 data, the Strait of Hormuz is a critical passage for approximately 20% of global crude oil, 20% of natural gas, and nearly 40% of helium supplies. The conflict has abruptly tightened energy supplies, inevitably causing a sharp spike in crude oil prices, with even steeper increases for natural gas and helium due to their higher storage costs. Furthermore, about 80% of the cargo transported through the Strait of Hormuz is destined for Asia, making Asian markets particularly sensitive. For instance, South Korean equities experienced a significantly larger decline than U.S. stocks in the first week of the conflict.
Secondly, the sharp rise in energy prices has directly prompted capital to flow from other markets into the energy sector. As the U.S. dollar is the primary trading and settlement currency, this liquidity shift has naturally increased demand for the dollar, explaining why the Dollar Index has largely moved in tandem with oil prices since the conflict's onset.
Thirdly, beyond the liquidity outflow driven by the conflict, other factors have compounded market effects. For example, gold prices rose rapidly early in the year, but a significant correction in early February largely eliminated expectations for a unilateral upward trend. Concurrently, driven by inflation expectations, market anticipation that the Federal Reserve will not cut interest rates this year has intensified rapidly. The combination of these factors meant that traditional safe-haven assets like gold and U.S. Treasuries did not rally due to the geopolitical risk; in fact, U.S. Treasuries experienced a decline substantially greater than U.S. stocks.
As the conflict enters its fifth week, the situation has shown clear signs of evolution, particularly with repeated signals from the U.S. suggesting a push for a ceasefire. Consequently, market pricing logic is poised for another shift. Observing future market developments requires close attention to four key indicators.
First, the South Korean stock market remains a crucial barometer. The KOSPI's gains this year have been largely fueled by advantages in memory chip production capacity. As mentioned, helium, a vital material for memory chip manufacturing, sees nearly 40% of its shipments pass through the Strait of Hormuz. Additionally, South Korea relies on the Strait for about 70% of its crude oil imports. Therefore, from a supply constraint perspective, the South Korean equity market exhibits heightened sensitivity.
Second, the term premium in crude oil prices warrants monitoring. Currently, the term premium for Brent crude remains negative. While the spot price has surpassed $120 per barrel, and the Brent June 2026 futures contract has also traded above $100 per barrel for two consecutive days, the -$15 per barrel premium suggests oil prices are not entirely out of control. However, if the spot price continues to climb while the term premium narrows significantly or even turns positive, it could signal a more severe energy crisis.
Third, the U.S. Treasury yield curve spread is a key metric. Since the conflict began, the entire yield curve has shifted upwards, but the spread between the 10-year and 2-year Treasury yields has narrowed noticeably, from around 74 basis points in early February to approximately 50 basis points. Historically, a narrowing or inverted yield spread has often indicated deteriorating market expectations for economic growth prospects.
Fourth, the correlation between gold and the U.S. Dollar Index has changed. During the first three weeks of the conflict, simultaneous gains in gold and the dollar were rare. However, in the fourth week, both assets rose together on three days, indicating a marginal shift in the flow of liquidity across markets.
Ultimately, the trajectory of events depends heavily on the progress of negotiations between the conflicting parties, with the stance of the U.S. administration being particularly pivotal. For instance, the U.S. "Misery Index," combining inflation and unemployment rates, has currently risen to 7.1-7.3. The contribution of both inflation and unemployment to this index is nearing levels reminiscent of the stagflation period of the 1970s-80s. Historical patterns suggest that when the Misery Index exceeds 7.3, the political influence of the two major parties in the U.S. often undergoes a reversal.
Given these circumstances, the primary policy focus is likely to be on managing the economic fallout. This would involve efforts to intervene in high oil prices to prevent inflation from becoming excessively high, supporting equity markets to stabilize corporate valuations and maintain market confidence, and ensuring monetary policy settings are conducive to stabilizing the labor market, potentially involving a recalibration of interest rate expectations.
In conclusion, compared to March, the market logic in April is certain to undergo significant changes.
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