Oil-Driven Paradigm Shift
Chart of the Week:
Rate Expectations Drive Gold; Lower Volatility May Renew Central Bank Buying
Traditionally, safe-haven demand supports gold prices. However, as gold yields no income, yields on high-grade sovereign bonds represent the opportunity cost of holding gold; rising yields are therefore a headwind.
Major Recap 1:
Israel-Iran War Headlines Continue to Drive Market Swings
Israel-Iran war developments continue to steer equity markets. Energy prices are shaping inflation and rate-cut expectations, driving synchronized volatility across equities and bonds and lifting their correlation. As of Thursday (26th), Iran rejected a 15-point U.S. peace proposal and continued strikes on regional energy infrastructure. Neighboring countries are preparing for potential military action, while reports suggest the U.S. may deploy badditional troops, raising the risk of ground conflict.
Major Recap 2:
Bonds Slide as Rate-Cut Expectations Sharply Repriced
Markets remain focused on how the Fed assesses inflation risks. Fed Governor Lisa Cook said the Iran conflict has shifted the risk balance, with inflation now a greater concern than employment. Bond markets continue to weaken as rate-cut expectations are sharply repriced. Rate futures now imply around a 50% chance of a 25 bps hike by year-end, with no cuts expected this year, and a fully steepened yield curve.
What’s Trending:
Sharp Oil Price Reversals Are Rare
The duration and severity of a potential closure of the Strait of Hormuz remain highly uncertain. Over the past 40 years, it has been rare for oil prices to surge and then quickly return to pre-geopolitical event levels. If prices remain elevated, this would likely add upward pressure on global inflation and delay or halt central bank rate cuts.
In Focus 1:
Oil Shock Impact Varies; Volatility to Drive Energy Diversification
A blockade of the Strait of Hormuz has raised concerns over energy supply disruptions in Asia, particularly given China’s high reliance on seaborne crude imports. However, China’s energy mix remains heavily coal-dependent. Despite policy efforts over the past decade to reduce coal usage and curb emissions, coal still accounted for over 50% of total energy consumption as of end-2024. High domestic self-sufficiency and long-term contracts have kept coal prices relatively stable, mitigating physical supply disruption risks.
In Focus 2:
Lower APAC Equity Valuations Offer Greater Shock Absorption
Conflict-driven disruptions to oil and gas supply have pushed prices sharply higher, while also weighing on the supply of chemical feedstocks—negative for production and overall economic growth. If supply disruptions extend beyond price volatility, sectors such as autos and components, transportation, chemicals, and metals will face greater pressure. Energy benefits the most, while insurance, media, pharmaceuticals, software/services, and regulated utilities remain relatively resilient.
