CICC: Has the market fully priced in the risks of Iran?

Zhongjin released a research report stating that since the outbreak of the Iran situation on February 28th, the conflict has entered the fourth week, and there are currently no signs of easing, but rather escalating. As long as it is not expected that the conflict will end in the third or fourth quarter, then the expectations currently included in US bonds and gold appear to be too pessimistic, meaning that there is a "long" price advantage. On the contrary, if there is concern that the conflict will continue into the second half of the year, then the currently underestimated expectations included in US stocks will face downward pressure; A/H shares will also inevitably be affected by high interest rates, especially growth styles. At the industry level, if the Iran situation continues to escalate, it may first affect market expectations for external demand sectors (concerns about high oil prices leading to recession), followed by cycles (reappearing shock demand logic, then turning to supply logic), and finally technology (high valuation pressure). At this point, perhaps only US dollar cash (short-term bonds) and defensive directions within A shares can provide good hedging effects (such as low volatility dividends, consumption real estate with low expectations, or low-priced stocks that have already experienced a correction or have low valuations). Key views of Zhongjin are as follows: Since the outbreak of the Iran situation on February 28th, the conflict has entered the fourth week, and currently there are not only no signs of easing but it is still escalating. With the continuous "substantial" blockade at the Strait of Hormuz, Israel's direct strikes on Iran's core energy facilities have intensified the impact on the global energy market, with Brent oil prices continuing to rise to over $110 per barrel, and TTF natural gas prices rising by 13% in a single day. The escalation of the situation and the energy "crisis" have also triggered increased turbulence in the financial markets, with gold plummeting by 15%, US bond yields surging to 4.4%, and fluctuation intensifying in US, A, and Hong Kong stock markets, with US bond volatility reaching a new high since April 2025. As the situation evolves, market expectations for the end of the conflict have been revised from the initial "quick resolution" to the current "long-term stalemate." According to Polymarket's betting odds, the probability of the conflict ending in March has dropped from 78% on February 28th to 4% on March 20th, and the highest probability of ending between April 1st and May 15th is now 44%. By using the expected Fed rate cuts as a benchmark and bridge for calculation, the bank found that different assets have significantly different expectations for the Iran situation and oil price paths included, which means not only risks but also opportunities. Under what circumstances can the Fed not cut interest rates? The conflict continues into the third or fourth quarter, and oil prices remain above $100. Without the Iran situation, US inflation will reach a high point of 2.8% in the second quarter and then fall back, and the Fed's baseline situation could still need and require 2-3 rate cuts. A $100 oil price is a "watershed," pushing the inflation high point from 2.8% to 3.5%, equivalent to the current federal funds rate (3.5-3.75%), meaning that it will be difficult for the Fed to cut rates in the short term, but after a brief boost, it can still fall back in the second half of the year, so it is more about delaying rate cuts. The bank calculated that a 10% increase in oil prices would push overall US CPI up by about 0.2-0.3 percentage points. Following the path calculated by the Commodities team at Zhongjin (Brent oil prices rising to $120 per barrel in the second quarter, then falling back to $80-90 in the third and fourth quarters), although the overall CPI will rise to around 4.6% year-on-year in the second quarter, the high base and the fall in oil prices will still push CPI down to 2.8-3.2%. In other words, the Fed can still cut rates in the second half of the year. Under what circumstances would the Fed be completely unable to cut rates this year? The bank's calculations show that to keep inflation above 3.5% without falling back due to the high base effect in the second half of 2025, oil prices would need to remain above $100 and continue into the third or fourth quarter. This extreme scenario aligns with the Commodities team at Zhongjin's expectations, where they predict that if the US-Iran conflict continues until the end of the year, Brent oil prices will rise to $150 per barrel in the second quarter, with the central oil price remaining at $100 in the third and fourth quarters. What expectations are included in various assets? US bonds, gold, and copper expect "no rate cuts" this year, while equity markets are relatively optimistic. The bank uses expectations of rate cuts included in assets as the basis for calculations, and copper, gold, and US bonds are most pessimistic, with CME rate expectations delaying rate cuts until September 2027, while equity markets are relatively optimistic. Copper: Has included expectations of slight rate hikes. Copper prices have fallen due to liquidity tightening and concerns about high oil prices squeezing demand, with LME copper prices and Comex copper prices falling by 10.6% and 12.4% respectively since the escalation of the Iran situation. The copper-oil ratio has fallen from a high of 219 in early January to the current 103, reaching the average since 2010, indicating that the market has already factored in expectations of weakened demand to some extent. The RSI relative strength index for Comex copper futures has also fallen to 33, close to the oversold range. The bank calculates that the current implied 1-year rate expectation for Comex copper prices ($5.35/pound) is 3.74%, higher than the current federal funds rate median of 3.625%, implying a 12bp rate hike in the future. Gold: Has included expectations of no rate cuts this year. Since the escalation of the Iran situation, gold prices have fallen by 15% to below $4,500 per troy ounce, due to the combined impact of the strengthening dollar, reduced rate cut expectations, and even liquidity tightening, with a significant acceleration in price declines last week. The corresponding RSI index has fallen from a high of 90 at the end of January to 29, entering the oversold range. The gold-oil ratio has fallen from a high of 79 in early January to the current 40, close to one standard deviation above the average since 2010. The bank calculates that the current gold price (around $4,492 per troy ounce) implies a 1-year rate expectation of 3.72%, slightly higher than the current federal funds rate median of 3.625%, suggesting a 10bp rate hike in the future. Assuming other factors remain constant, the rate expectation of no rate cuts until September 2027 corresponds to a gold price of $4,500 per troy ounce. US bonds: Also expect no rate cuts this year. Since the US-Iran conflict erupted on February 28th, 10-year US bond yields have risen by 44bp to 4.38%. The main driving factors are: 1) dominant real interest rates (31bp) and simultaneous rise in inflation expectations (13bp), reflecting the market's pricing in of the Fed maintaining a high rate for a longer period (Higher for Longer). 2) Rate expectations dominate (27bp), with term premia remaining basically flat, reflecting that rate fluctuations are mainly focused on re-anchoring rate cut paths. This is consistent with the information reflected in rate futures, where the implied federal funds rate future for the past year has risen by 70bp since February 28th, meaning that the market's expectation of two rate cuts this year has been erased before the US-Iran conflict, and the implied rate cut time has been further pushed back from October 2026 to September 2027. The relatively pessimistic expectations imply that the 4.4% long-term US bond yield has basically priced in the most stringent monetary policy path, whereas if the conflict ends by the second quarter, current long-term US bonds may have room for a long position. US stocks: Some rate cut expectations are still included in valuations, but the impact of sustained high oil prices on earnings has not been factored in yet. Since the start of the US-Iran conflict, US stocks have been relatively "resilient" in the global equity markets, partly because equity markets often react to rate cut expectations after bonds, and partly because it is believed that Trump will "TACO" again. Decomposing index performances, although valuations have contracted significantly due to the impact of higher interest rates, the restoration of risk appetite partly offsets the drag on valuations from rising rates, especially as earnings expectations for the S&P 500 and Nasdaq indices are still being revised upwards, making the overall index decline relatively manageable. If the situation escalates, US stocks could face a 10% decline: valuation "revision" could lead to a 3-4% decline, and earnings expectations will gradually factor in the impact of high oil prices, expected to fall by 6-7%. Conversely, if the US-Iran conflict ends by the second quarter, valuations are expected to recover, but based on the inhibition of earnings by oil prices in the first half of the year, the bank has slightly lowered its year-end target for the S&P 500 from 7,600-7,800 to 7,100-7,200. Chinese markets: Internal divisions, with Hong Kong and A-shares in growth sectors sensitive to liquidity. For the Chinese market, Hong Kong and A-shares in growth sectors such as the ChiNext 50 are more sensitive to the US dollar and US bond rates. If US bond rates and the US dollar remain high, they will inevitably have some impact on growth-oriented stocks in Hong Kong and A-shares, which are more sensitive to overseas liquidity and US bonds. Since the escalation of the Iran situation, the ChiNext 50 (-11.4%), Hang Seng Tech Index (-5.2%), and Hang Seng Index (-5.1%) have experienced greater declines due to their greater sensitivity to USD liquidity. However, Hang Seng Tech had already fallen before the Iran situation, providing some "protection" for downward valuation. Other major indices in A shares have shown relative resilience, with the Shanghai Composite and the CSI 300 down 4.9% and 3.1% respectively, while the Growth Enterprise Market Index has even risen against the market trend by 1.3%. In addition, if oil prices continue to gyrate at high levels, the bank calculates that it will also drag down corporate earnings by low single digits, especially in industries such as chemicals and transportation. In addition, high oil prices will continue to support a strong dollar. In the short term, the rapid surge in oil prices will be supported by the following factors: 1) the US becoming a net oil exporter after the shale revolution, giving the US a smaller negative impact from rising energy prices compared to economies such as Europe and Japan, 2) the surge in oil prices pushing up inflation expectations and suppressing rate cut expectations, 3) liquidity tightening requiring cash, all of which support a stronger dollar. If oil prices remain above $100 for an extended period, risking global stagflation or even recession, although the US will not be immune, the pressure on Europe, Japan, and other economies could be greater, passively supporting the US dollar at high levels. Looking back at the aftermath of the Russia-Ukraine conflict in 2022, the global economy fell into stagflation, with the US facing a smaller negative impact from rising energy prices compared to economies such as Europe and Japan, combined with the Fed's aggressive rate hikes to combat high inflation which led to the dollar's continuous rise from 97 to 114.