Investors are evaluating the potential outcomes of U.S. President Donald Trump's demand for Iran to reopen the Strait of Hormuz, signaling that the latest standoff is approaching a critical juncture.
Some investors are reducing exposure and increasing cash holdings, concerned that broader regional disruption could occur if the U.S. and Iran follow through on threats. Others are positioning for market volatility itself, anticipating sharp swings regardless of the outcome. A smaller group is preparing to buy on dips, betting on Trump's recurring strategy of escalating rhetoric before ultimately stepping back from aggressive action.
The U.S. President has threatened to strike Iranian power facilities if the strait is not reopened by Monday evening New York time, intensifying a conflict that has already unsettled global markets for weeks. For traders, the challenge is no longer just managing risk but forecasting a wide range of potential ripple effects.
Michael Brown, Senior Research Strategist at Pepperstone Group, said, "This deadline is critically important. Given the high stakes—essentially an either-or outcome between de-escalation and major escalation—market participants simply cannot ignore this looming turning point."
Over the past month, markets have been pricing in the effects of the war and its impact on energy supplies. Stagflation risks have risen, expectations for earlier interest rate hikes have grown, and both equities and bonds have declined. The U.S. dollar has resumed its role as a safe-haven currency, while traders have sought selective opportunities in defense stocks, renewable energy, and Malaysian assets.
Asian equities bore the brunt of Monday's selloff, falling more than 3% for a third consecutive day and nearing technical correction territory. Bonds also declined, while gold erased its year-to-date gains amid heightened inflation concerns. European stocks are also approaching correction levels.
For investors already worn down by extreme market swings, Trump’s ultimatum has reinforced caution. Many are choosing to further reduce risk rather than chase new opportunities.
Jon Withaar, Portfolio Manager at Pictet Asset Management, stated, "No one believes Iran will back down, especially after they issued counter-threats against regional infrastructure." He added that the fund is increasing index-level hedges in Japanese markets due to what he described as "buyer exhaustion."
Oil traders have reacted relatively calmly to the latest threats, preferring to wait for actual developments rather than make major trading decisions prematurely. Stefano Grasso, Senior Portfolio Manager at Singapore-based fund 8VantEdge Pte, who previously traded physical energy, noted that with Brent crude near its highest closing level since mid-2022—up more than 50% since strikes against Iran began in late February—further rhetoric has limited immediate impact.
Grasso said, "The market has reached a point of 'rhetoric saturation.' Threats like 'total destruction' are already priced into triple-digit oil. Traders won’t act again unless the 48-hour deadline passes and we see real changes on the ground."
As the deadline approaches, fund managers are focused on one key question: Who will back down, and what will that mean for oil markets, which have been central to the spillover into other asset classes?
Since the conflict began, hedge funds have been reducing or hedging currency positions as uncertainty makes forex markets highly news-driven. In rates markets, the steepening trade came under significant pressure last week as oil surpassed $100 per barrel.
Meanwhile, market participants are now pricing in the possibility of four Bank of England rate hikes this year. Informed sources suggest the European Central Bank is also preparing to raise rates as early as its next meeting. Traders are also increasing bets on Federal Reserve rate hikes, now pricing in 20 basis points of tightening by year-end.
Massimiliano Bondurri, CEO of SGMC Capital Pte Ltd, said, "We began cutting long fixed-income exposure early in the conflict and will continue to do so depending on price action. Overall, fixed income is not attractive at current credit spreads—we prefer to reduce positions and wait for better entry points later."
Globally, equity markets have lost approximately $11.5 trillion in value since the Iran conflict began, a decline comparable to the $12.2 trillion drop triggered by Trump's tariffs a year ago. During the same period, global bond values fell more than $2.5 trillion, while the Bloomberg Dollar Index rose over 2%.
