A relentless reckoning is unfolding! Soaring oil prices crush interest rate cut fantasies, and cross-asset selling sweeps across the globe.

Since the large-scale preemptive military action against Iran by the United States and Israel, known as "Operation Epic Fury," was launched on February 28, the financial markets have generally been holding on to those comforting optimistic bets for most of the time: namely, that the interruption of oil supply in the Middle East will be very short-lived, the Strait of Hormuz will reopen shortly, international oil prices will rapidly decline, fueling expectations of economic growth, and the Federal Reserve's loose monetary policy cycle will quickly resume. However, on Friday, these optimistic bets seemed to have been shattered. Global stock and bond markets fell simultaneously on Friday, with particularly sharp declines in the major U.S. stock market indices. The classic safe haven asset, gold, is currently heading towards its worst week since 1983. Bond market traders even priced in a 50-50 chance of the Federal Reserve potentially raising interest rates instead of cutting them in the second half of the year, while the S&P 500 index continued its longest weekly decline in a year. By contrast, just last month, the bond market was pricing in the possibility of the Fed cutting rates 2-3 times, and even suggesting a restart of rate cuts as early as June. Since the outbreak of the new round of geopolitical conflict, the market has been undergoing a stress test. With Israel bombing crucial gas fields and Qatar's natural gas production capacity being significantly reduced under the shadow of war with Iran, this week marks an escalation in geopolitical tensions. While President Trump has indicated on social media a gradual "de-escalation" of military actions against Iran, senior U.S. government officials have stated that the White House is sending hundreds of Marines to the Middle East and considering a plan to send ground troops to take control of Iran's oil export hub on Kharg Island. Brent crude oil is hovering around $110 per barrel, no longer experiencing a brief wild surge - indicating that high oil prices could be an ongoing major threat that investors, central bank policymakers, and corporate leaders must confront. The Federal Reserve, as expected by the market, kept its benchmark interest rate unchanged on Wednesday, but Fed Chair Jerome Powell clearly signaled a hawkish stance at a press conference, emphasizing that the oil price impact has made the U.S. inflation outlook too uncertain to provide a timeline for easing. Powell emphasized multiple times that the Fed may not return to a rate-cutting path until inflation cools down - and this is not even taking into account the potential inflationary effects of the Middle East war, underscoring that it is too early to make judgments on the war's impact. "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 progress on that front, then you're not going to see rate cuts." These remarks from the Fed Chair came after two consecutive meetings where the Fed decided to keep rates unchanged. This reinforces the view that, due to lack of cooperation in consumer price data, the Fed is still far from returning to the series of rate cuts initiated at the end of 2025. The sticky inflation trend has also raised the possibility that the Fed's next move could eventually turn into a hike. In contrast to the United States, which has vast oil and gas resources, Europe, which is highly dependent on imported energy, seems to face more significant energy-driven inflation pressures. The European Central Bank and the Bank of England are together facing a more severe version of the same problem - in the situation of energy-driven inflation seriously hindering rate cuts, despite deteriorating economic growth prospects, they are forced to remain on hold and may even switch to a path of rate hikes from April. Interest rate futures markets are pricing in a 75% chance that the ECB will initiate its first rate hike as early as April and almost fully price in three 25 basis point hikes this year. The Iran war is increasingly likely to become a "protracted tug-of-war" The Iranian military has effectively "semi-blocked" the Strait of Hormuz, meaning around 20% of global energy flows are completely disrupted, accompanied by oil tanker attacks and shipping interruptions. A recent study by the International Energy Agency (IEA) indicated that the U.S. and Israeli military action against Iran at the end of February has triggered the largest supply disruption in the history of the global oil market; at the same time, the U.S. government is considering using military means (including potential ground or semi-ground control) to restore shipping channels and completely control the Strait of Hormuz. However, the key is that while blocking is relatively easy, maintaining the blockade or competing for control requires a continuous strong military presence, reopening the channels is even more challenging (involving mine sweeping, escorting, air superiority, port control), which means that if the U.S. and Israel become embroiled in a "channel control game" with Iran, this round of the Middle East war could shift from air strikes and naval blockades to a complete turn towards node contention (such as Harq Island), ultimately signifying a prolonged standoff where both sides' forces are at risk of evolving into a protracted tug-of-war similar to the "Iran-Iraq War" of the 1980s. Therefore, the price structure of the global oil benchmark, Brent crude futures, has entered a "non-linear supply-side shock range", with $100 oil price seemingly no longer a ceiling, but a central re-pricing point. A recent research report by Goldman Sachs suggests that in the short term, oil prices are likely to continue to rise, as the flow in the Strait of Hormuz remains extremely low, and if the market focuses on the risk of extended interruptions, Brent crude futures prices have the potential to surpass the historical highs of 2008. The institution believes that given recent attacks on energy infrastructure, there is a high probability that the Iran war will significantly lift oil prices above $100 in the long term. Goldman Sachs' in-depth analysis of the five largest supply shocks in history shows that on average, four years after the outage, production is still affected by 42%, often reflecting damaged infrastructure and underinvestment. According to Goldman Sachs' statistics, Iran and seven other Gulf countries' oil production in 2025 reached 3.5 million barrels/day and 21.8 million barrels/day, accounting for 30% of global oil supply - if continuous reduction occurs, it will put long-term upward pressure on oil prices. Goldman's scenario analysis shows that whether in the short term or by 2027, oil price risks still lean towards an upward trajectory. The persistence of past significant supply-side shocks, and the ease with which geopolitical conflicts can evolve into a protracted tug-of-war, underscore that with the risk of extended disruptions and sustained significant supply losses, oil prices may remain above $100 per barrel for an extended period of time. The "clearing period" for global financial markets "Last week can be described as a very typical clearing period, where every corner of the global financial markets finally started to face reality: this conflict will not only last longer than what the market had previously optimistically expected, but it also seems to rapidly evolve into the worst-case scenario - a direct strike on all energy infrastructure in that region." Siebert Financial's Chief Investment Officer Mark Malek stated. As shown in the chart above, market pressure has reached levels reminiscent of the "Liberation Day" period in early April 2025 when Trump launched an aggressive trade war globally - the global market risk indicator has surged to the highest level since April. According to an index by Bank of America, massive cross-market pressure is accumulating at the fastest rate since the tariff shock of last year. Stock and credit trades based on expectations of rate cuts are being unwound simultaneously and rapidly, while emerging markets are under constant pressure. These latest market sell-off dynamics highlight investors' anxiety about the prolonged nature of the Middle East war, which intensified on Friday, while U.S. President Donald Trump once again criticized military allies for not joining the war or assisting in reopening the Strait of Hormuz. The strait is currently still under the semi-blockade of the Iranian military. ETFs tracking the S&P 500 index, long-term U.S. Treasuries, and gold all recorded their worst overall performance since the outbreak of the war. As shown in the chart above, the geopolitical turmoil in the Middle East has already sparked intense volatility across asset classes. With Thursday's market volatility surging, France's Industrial Bank lowered its recommended global stock market allocation by 5 percentage points and simultaneously raised the commodity allocation by the same amount. BCA Research advised clients to increase cash allocation and lower equity allocation. Goldman Sachs' global investment research department recommended a defensive layout, adjusting its tactical asset allocation to overweight cash and underweight credit for three months, while maintaining neutral allocations for other major asset classes. "Day by day, the market is gradually pricing in longer and more extensive chain effects," said Garrett Melson, portfolio strategist at Natixis Investment Managers, who recently reduced exposure to small-cap stocks while increasing exposure to fundamentally strong large-cap growth stocks and technology stocks. The damage from sustained high energy prices will not manifest all at once. It often transmits through specific channels - household budgets, corporate profit margins, financial market benchmark conditions, international foreign exchange markets, and central bank credibility - these channels amplify each other, making the ultimate cost far higher than the level implied by high oil prices above $100 per barrel. The U.S. economy is beginning to feel the impact of the severe shockwaves from high oil prices Christopher Waller, a Federal Reserve Governor with permanent voting rights on the FOMC, stated on Friday that he is cautious and continues to watch how high oil prices will affect inflation, even though weak employment could still support expectations of rate cuts. He pointed out that geopolitical conflicts seem to be more prolonged, thereby raising the risk of oil prices remaining high for a longer period. "If this interest rate-energy shock continues and even intensifies, pricing for expansionary growth in various asset classes may need to adjust in a more pessimistic direction," said Christian Mueller-Glissmann, head of asset allocation research at Goldman Sachs' global investment research department. "Markets have not priced in too much economic growth risk, which partly explains why at least in the U.S., the stock market has not seen such a significant bear market level pullback." In the U.S., consumers are already beginning to bear the initial impact of this Iran war. U.S. gasoline prices are approaching $4 per gallon, with about 80 cents of the increase per gallon mainly attributed to this geopolitical conflict, according to the U.S. Bank Economic Research Institute. Data compiled from credit card and debit card transactions by U.S. Bank shows that in the week ending March 14, U.S. gasoline spending increased by over 14% year-on-year - this spending must be squeezed out from elsewhere. If the impact persists, consumer confidence is at significant risk of a major downward trend. The pressure is not only reflected at the gas station. Businesses that had made their 2026 investment plans based on lower borrowing costs might have to reassess their future investment plans in the U.S.; industries with high energy consumption are facing cost pressures, either to absorb them internally or pass them on to already pressured consumers. As a fuel embedded in almost every supply chain, diesel prices are rising even faster than gasoline, exacerbating the risks of a broader drag on U.S. manufacturing and the real economy. In the financial markets, this adjustment could further broaden - valuations and credit spreads that were founded on overly strong expectations of rate cuts earlier this year may still have significant downside potential, and overseas investors may face the risk of capital outflows that domestic policies may struggle to offset under severe selling pressure. "Risk premiums should be higher - this is the largest-ever energy supply shock in history, and there is almost no simple fiscal, monetary policy, or energy supply-demand policy that can effectively cope with it, hence the risk of recession should significantly increase," said Priya Misra, portfolio manager at J.P. Morgan Asset Management. "Stocks and credit spreads have shown too much resilience, mainly because the market is hopeful that the strong balance sheet fundamentals driven by the long bull market in stocks in recent years will enable households and businesses to absorb this energy shock completely."