The current market environment is being driven less by traditional economic cycles and more by geopolitics, with the ongoing Middle East conflict, particularly tensions involving Iran and disruptions around the Strait of Hormuz acting as a major catalyst for global asset repricing.
At the core of this is energy, where roughly 20% of global oil supply passes through this chokepoint, making any disruption immediately inflationary. Oil prices pushing above $100 are not just a headline, they feed directly into transportation, manufacturing, and food costs, reinforcing already sticky inflation across economies.
This creates a difficult backdrop for central banks, who are now trapped between supporting slowing growth and containing inflation that refuses to ease. As a result, expectations for aggressive rate cuts are likely too optimistic, and markets may need to reprice accordingly.
What stands out is the disconnect in equities, where parts of the market continue to show resilience, largely driven by AI optimism and liquidity expectations, despite clear macro deterioration. This is classic late-cycle behavior, which is where risk assets holding up on narrative rather than fundamentals. Early signs of stress are already visible through episodic equity pullbacks and increased volatility, particularly when oil spikes.
Meanwhile, commodities, especially energy, have emerged as the clear outperformers, but this is not a healthy bull trend; it is a crisis-driven premium that carries its own risks, including demand destruction if growth slows further.
In FX markets, the reaction has been more textbook, with safe-haven currencies strengthening and risk-sensitive currencies facing pressure, reflecting a broader shift toward defensive positioning. The bigger issue, however, is structural rather than temporary. If the conflict persists, this evolves into a prolonged energy shock similar in nature, though not yet in magnitude, to historical crises, potentially embedding higher inflation into the system. That would force a reset in valuations, keep bond yields elevated, and weigh on global growth expectations.
From my standpoint, the market currently appears too complacent, underpricing the risk of sustained inflation and overestimating the ability of growth narratives to offset macro headwinds. My view is straightforward: if oil remains elevated and geopolitical tensions persist, the current calm in risk assets will not hold. Volatility is likely to remain elevated in the near term, with markets increasingly driven by headlines, but over the medium term, this dynamic points toward a more meaningful repricing of risk as reality catches up with sentiment.
Compiled by Connie
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