With oil prices surging past $100 and conflicts still ongoing, will the global market get even worse in the second quarter?

As the financially challenged markets enter the second quarter, the shadow of regional conflict-related news still looms over the world. This background may further push the stock market to test new lows, while the significant selling in the bond market may attract buyers back in. Investors generally believe that even if the conflict is resolved and short-term market sentiment improves, the damaged energy infrastructure in the Middle East and the continued high oil prices will still drag down economic growth and push up inflation. In this scenario, the stock market is likely to further retreat; if the conflict continues to escalate, concerns about economic growth will outweigh inflation anxieties, and the bond market may see some recovery. Seema Shah, Chief Global Strategist at Signia Asset Management, which manages around $59.4 billion in assets, said, "When the market is filled with all sorts of noises, it is difficult to see clearly through the fog. We have always recommended increasing the allocation to international stocks, and that logic still holds, but it does not mean completely pulling out of the US market." The turbulent first quarter began with conflicts in the Middle East, and the markets were also disrupted by Trump's intervention in the situation in Venezuela, threats related to Greenland, and the technological transformation in artificial intelligence (AI). Crude oil became the most eye-catching asset of the quarter, with prices soaring by about 90%, surpassing the $100 per barrel mark. This trend caught bond investors off guard, as market expectations for rate hikes sharply increased. Analysts surveyed expect that as long as the current supply disruptions continue, oil prices will fluctuate in the range of $100 to $190, with an average forecast of $134.62. Data from the online prediction market Polymarket shows that the probability of the war ending by mid-May is about 36%, and by the end of June, the probability is 60%. Similar to the scenario of soaring inflation in 2022, short-term borrowing costs in the UK and Italy surged by 75 basis points this quarter, and significant fluctuations were also seen in the bond markets of the US, Germany, and Japan. Manish Kabra, Multi-Asset Strategist at Industrial Bank in France, pointed out, "Looking back on all the oil shocks in history, only two factors are crucial: the duration of the shock and the central bank's response measures, which determine the overall risk appetite." After the outbreak of the Iran conflict, traders have completely ruled out the possibility of a rate cut by the Fed within the year; the eurozone markets expect three rate hikes, the UK at least two hikes, while previously the market had expected these economies to start a rate-cutting cycle. The easing process for currencies in emerging markets has also been interrupted as a result. Kabra believes that the Memorial Day weekend in May in the US may become a focus for the market - the beginning of the summer travel season when consumers may pressure policymakers to control energy costs. After the outbreak of war, he has increased the allocation of commodities from 10% before the war to 15%, reflecting the increasingly close relationship between geopolitics and commodities. Under pressure in the bond market, the stock market may follow suit. In the bond market, investors have been selling off in anticipation of rising inflation and interest rates, leading to a sharp drop in bond prices and a rise in yields, but some investors have begun to focus on opportunities after the bond market correction. Francesco Sandrini, Head of Multi-Asset Strategy at Amundi, said the institution has increased its allocation to short-term Eurozone government bonds and maintained exposure to 5-year US government bonds. The reasoning behind this is: once a crisis solution emerges, fixed income assets are likely to perform well. "In short, we expect major central banks to try to ignore short-term price pressures." Paul Eitelman, Global Chief Investment Strategist at Russell Investments, said that compared to a few months ago, bonds have become significantly more attractive, and he believes that the strength of the US dollar is unlikely to sustain in the medium term. The dollar showed its safe-haven qualities again in March, rising over 2%. Analysts point out that before the war, investors had shifted from US assets to other markets, putting pressure on the dollar; if the conflict ends, this trend may reappear. At the same time, gold prices fell by 4% in March. While safe-haven assets usually rise when inflation concerns worsen, gold prices weakened as investors closed profitable positions to offset losses in other assets. Benefiting from strong earnings and the tech boom, the stock market had shown relatively stable performance previously, but selling pressure has recently intensified. The S&P 500 index and the Euro Stoxx 600 index have fallen by 9% to 10% from recent historical highs, while the Nikkei index in Japan has slipped nearly 13% from its peak in February. Guy Miller, Chief Market Strategist at Zurich Insurance Group, said that as the economic outlook deteriorates, he has reduced his stock positions from a "overweight" before the war to "underweight." Consumer confidence in the US fell more than expected in March, while investor confidence in Germany sharply deteriorated. The global purchasing managers indices for the Eurozone and the US in March hit multi-month lows. Analysts believe that although the US economy is relatively resilient and is an energy export country, if the conflict continues to drive up energy prices, the US economy will still be affected. The OECD warned last Thursday that the global economy has deviated from its originally stronger growth trajectory. Miller of Zurich Insurance emphasized, "This war is different from the geopolitical and political events we have experienced in the past year, as the impact on corporate profits, profit margins, and market valuations has been minimal."