A no escape reckoning is unfolding! Soaring oil prices shatter interest rate cut fantasies, cross-asset sell-off sweeps the world.

Since the large-scale preemptive military action against Iran launched by the United States and Israel on February 28 - the "Epic Fury Operation" has been in operation for nearly three weeks, the financial markets have, for the most part, held on to those reassuringly optimistic bullish market bets during most of the time: that the interruption of oil supply in the Middle East will be very short-lived, the Strait of Hormuz will reopen shortly, and international oil prices will quickly decline, driving up economic growth expectations, and the Federal Reserve's loose monetary policy cycle will quickly recover. However, on Friday, these optimistic bets seemed to be shattered. On Friday, global stock and bond markets fell simultaneously, especially the three major benchmark indices in the US stock market recorded significant declines. The classic safe-haven asset, gold, is currently heading towards its worst week since 1983. Bond market traders even priced in a fifty-fifty chance on Friday that the potential next policy action of the Federal Reserve in the second half of the year would be a rate hike rather than a rate cut, and the S&P 500 index continued its longest weekly decline in a year. In contrast, last month the bond market had priced in the possibility of the Fed cutting rates 2-3 times, and even priced in the possibility that the Fed would restart its rate cutting cycle in June at that time. Since the outbreak of the new round of geopolitical conflicts, the market has been under pressure. With Israel bombing important gas fields for the Iranian economy and Qatar's natural gas production capacity set to be significantly reduced under the war with Iran, this week marks an escalation of geopolitical tensions. Although President Trump indicated on social media that he is considering a gradual "de-escalation" of military actions against Iran, some senior US government officials have stated that the White House is sending hundreds of marines to the Middle East and is considering a plan to send ground troops to seize Iran's environmental island oil export hub. Brent crude oil is hovering around $110 per barrel and is no longer experiencing a brief wild surge - indicating that high oil prices may be a persistent major threat, and investors, central bank policy makers, and business leaders all have to face this reality. As expected by the market, the Federal Reserve maintained its benchmark interest rate on Wednesday. However, Federal Reserve Chairman Jerome Powell explicitly released a hawkish stance at the press conference, emphasizing that oil price shocks have made the US inflation outlook too uncertain to provide a timeline for easing. Powell has repeatedly emphasized that the Fed may not return to a rate cutting trajectory until inflation cools off again - and this does not yet take into account the inflationary impact of the Middle East war, emphasizing that it is too early to judge the impact of the war now. "What we really want to see this year, and it's very important, is progress on inflation," Powell said at the press conference. "If we don't see that progress, then you won't see rate cuts." The Fed chairman made these remarks after two consecutive meetings where the interest rate was kept unchanged. These remarks reinforce the view that the Fed is still a long way from restoring the series of rate cuts it started at the end of 2025, as consumers' price data has always been uncooperative. This inflation stickiness trend also creates the possibility that the Fed's next move may eventually turn into a rate hike. In contrast to the US, Europe, which is heavily dependent on imported energy, seems to face more significant energy-driven inflationary pressures. The European Central Bank and the Bank of England are both facing similar, more severe problems - in the case of energy-driven inflation severely hindering rate cuts, they may have to stand still and even turn to a rate hike path from April. The rate futures market expects the ECB to start its first rate hike in April, with a probability of 75%, and almost fully pricing in three 25-basis point rate hikes this year. Iran's war is becoming more likely to turn into a "protracted tug-of-war" The Iranian military has effectively "semi-blocked" the Strait of Hormuz, meaning that around 20% of global energy flows are fully blocked, accompanied by attacks on oil tankers and disruptions in shipping. Recent research by the International Energy Agency (IEA) shows that the US and Israeli military action against Iran at the end of February triggered the largest supply disruption in the history of the global oil market; at the same time, the US government is considering restoring shipping routes and completely controlling the Strait of Hormuz through military means (including potential ground or semi-ground control). However, the key to blocking is easy, but maintaining the blockade or competing for control requires a sustained, strong military presence, reopening the passage is even more difficult (involving mine sweeping, escorting, air control, port control), all of which mean that once the US and Israel enter into a "control over the route" game with Iran, this round of Middle East war may shift from air strikes and naval blockades to a complete shift to node contention (such as the destruction of Kharg Island), ultimately meaning that under prolonged standoff both sides may evolve into a situation similar to the "Iraqi-Iranian War" of the 1980s. Therefore, as shown in the Brent crude oil futures price structure chart above, oil prices have entered a "non-linear supply shock range" where $100 oil prices no longer seem like a ceiling, but a central point. Goldman Sachs recently published a research report stating that in the short term, oil prices are likely to continue to rise as flow rates in the Strait of Hormuz remain extremely low, and if the depressed flow rates focus on the risk of extended interruption time, Brent crude oil futures prices could surpass the historical high of 2008. The institution believes that given the recent attacks on energy infrastructure, there is a high probability that the Iran war will push oil prices to stay above $100 in the long term. Goldman Sachs' scenario analysis provides a deep analysis of five of the largest supply shocks in history, showing that on average, four years after such shocks, production is still down by 42%, often reflecting damage to infrastructure and low investment. Goldman Sachs data shows that by 2025, Iran and seven other Persian Gulf countries will have crude oil production of 3.5 million barrels per day and 21.8 million barrels per day, respectively, accounting for 30% of global oil supply, and a sustained decline in production would put long-term upward pressure on oil prices. Goldman's scenario analysis shows that oil price risks are biased towards the upward direction in both the short term and by 2027. The sustainability of large supply-side shocks in history and the ease with which geopolitical conflicts can evolve into long-term tug-of-war situations highlight the risk scenarios of prolonged interruption time and sustained significant supply losses, indicating that oil prices may stay above $100 per barrel for a longer period of time. The "clearing period" of the global financial market "Last week can be described as a very typical clearing period where all corners of the global financial market finally began to face reality: this conflict will not only last longer than the market previously had optimistically expected, combined with an unpredictable end, but it also seems to quickly evolve into the worst case scenario - a direct strike on all energy infrastructure in the region." said Mark Malek, Chief Investment Officer at Siebert Financial. As shown in the chart above, market pressures are approaching levels not seen since President Trump initiated his aggressive trade war globally in early April 2025 - with global market risk indicators hitting their highest levels since April. According to an index from Bank of America, significant cross-market pressures are accumulating at the fastest rate since the tariff shock last year. Stock and credit trades based on the forecast of a rate cut are both closing rapidly and synchronously, while emerging markets are under increasing pressure. These latest sell-off dynamics highlight investors' anxiety about the protracted nature of the conflict in the Middle East increasing on Friday, while President Trump again criticized military allies for not joining the war or assisting in reopening the Strait of Hormuz. The strait is currently still under the blockade of the Iranian military. ETFs tracking the S&P 500 index, long-term US government bonds, and gold have all recorded their worst overall performance since the outbreak of the war. As shown in the chart above, the turmoil in the Middle East geopolitics has sparked intense volatility across asset classes. As market volatility spiked on Thursday, Industrial Bank of France downgraded its recommended global stock market allocation by 5 percentage points while simultaneously increasing the allocation to commodities by the same amount. BCA Research advised clients to increase cash allocation and reduce stock allocation. Goldman Sachs' global investment research department advised a defensive positioning, adjusting tactical asset allocation to overweight cash and underweight credit, while maintaining a neutral allocation to other major asset classes. "Day by day, the market is gradually factoring in longer and more widespread chain effects," said Garrett Melson, portfolio strategist at Natixis Investment Managers, who recently reduced exposure to small-cap stocks and increased exposure to large-cap growth stocks and tech stocks with strong fundamentals. The damages caused by sustained high energy prices will not manifest all at once. They often manifest through specific channels - household budgets, corporate profit margins, benchmark conditions of financial markets, international exchange rate markets, and central bank credibility - these contributing factors amplify each other, making the ultimate cost far higher than implied by the high oil price level above $100. The US economy is starting to feel the brunt of the drastic impact of high oil prices Christopher Waller, a Fed governor who has permanent FOMC monetary policy voting rights, said on Friday that he is cautious and takes a wait-and-see approach on how high oil prices will affect inflation, although weak employment could still support rate cut expectations. He pointed out that it appears that geopolitical conflicts have become more long-lasting, increasing the risk of high oil prices being sustained over a longer period. "If this interest rate - energy shock continues or even intensifies, the pricing of growth in various asset classes may need to be adjusted in a more pessimistic direction," said Christian Mueller-Glissmann, head of asset allocation research at Goldman Sachs Global Investment Research. "The market has not factored in too many risks to economic growth, which partially explains why at least in the US, the stock market has not experienced such a significant bear-market level retracement." In the US, consumers have already begun to feel the initial impact of this round of the Iran war. Gas prices in the US are approaching $4 per gallon, and the US Bank Economic Research Institute estimates that about $0.8 per gallon of the price increase is mainly due to this geopolitical conflict. Data from credit cards and debit cards compiled by US Bank show that as of the week ending March 14, US gasoline spending increased by over 14% year-on-year - this expense must come from elsewhere. If the impact continues, consumer confidence will face significant downside risks. The pressure is not just limited to gas stations. Companies that have made investment plans for 2026 based on lower borrowing costs may have to reassess their investment plans in the US for the future; high-energy industries face cost pressures, either digesting them themselves, or passing them on to already strained consumers. Diesel prices, as a fuel embedded in almost all supply chains, are rising even faster than gasoline, exacerbating the risk of a broader drag on the US manufacturing industry and the real economy. In the financial markets, this adjustment could further expand - valuations and credit spreads based on overly strong expectations of rate cuts earlier this year may still have significant downside potential, and investors from overseas economies may face increasing capital outflows that domestic policies may not be able to offset under intense selling pressure. "Risk premiums should be higher - this is the largest supply shock in history, and there is almost no simple fiscal, monetary policy, or energy supply-demand policy that can effectively address it, so the risk of recession should be significantly increased," said Priya Misra, portfolio manager at JPMorgan Asset Management. "The stock market and credit spreads demonstrate too much resilience, as the market hopes that the strong balance sheets driven by the recent long bull market in stocks means households and businesses can fully absorb this energy shock."