Thoughts from Themes: The Strait and Narrow

Global markets are once again confronting a familiar reality: geopolitical shocks can quickly reshape the economic outlook. The escalating conflict between the U.S., Israel, and Iran initially triggered a classic “risk-off” response, sending oil sharply higher, pressuring Asian equities and currencies, and driving investors toward traditional safe havens. Yet after the initial shock, markets appear to be stabilizing rather than spiraling, with U.S. equities showing resilience even as energy prices and inflation expectations rise. This week we examine how the conflict is rippling through global markets, from energy-sensitive economies across Asia to renewed demand for gold, the U.S. dollar, and even Bitcoin as investors gauge whether disruptions around the Strait of Hormuz will escalate or begin to ease.

Minding the Middle East

U.S. markets are proceeding through the Iran attacks with caution but increasing optimism. Initially, investors reacted with a classic “risk off” posture following the outbreak of war in Iran, with equities selling off, Treasury yields falling, energy prices spiking, and crypto showing mixed but generally risk sensitive behavior. The severity of the reaction reflects fears of prolonged conflict, potential disruption to Gulf energy flows, and uncertainty around Iranian retaliation.

The escalation of the US-Iran conflict, marked by joint US-Israeli airstrikes beginning in late February 2026 and Iran's retaliatory missile barrages, has profoundly influenced US financial markets, initially triggering sharp volatility driven by fears of global supply disruptions and inflation, before evolving into a more measured but persistent risk aversion as of March 6, 2026. In the energy sector, markets reacted immediately with crude oil prices surging over 30% in the first week, as West Texas Intermediate futures breached $90 per barrel amid threats to the Strait of Hormuz, through which 20% of global oil flows, raising specter of supply halts and prices potentially reaching $150 per barrel if Gulf exports cease. Energy equities have benefited from this price increase and have increased inflations concerns. The possible energy disruption has also pressured Asian equities, specifically in China and Korea over soaring energy prices should the disruption persist.

Defensive sectors like defense contractors rallied on prospects of increased US spending, potentially ballooning deficits, while economically sensitive areas such as airlines, cruises, and transportation were significantly lower. US markets have shown relative resilience compared to Europe and Asia, with the S&P 500 trading roughly flat since hostilities began, as investors price in limited direct earnings impact given the US's net oil exporter status and the energy sector's mere 2.5% weight in the index.

Fixed income markets saw Treasury yields climb, with the 10-year note yield rising 3.5 basis points to 4.171% today, as inflation expectations embedded in the breakeven rate hit a three-week high, pressuring long-duration bonds and fueling volatility; this evolution from initial safe-haven buying to yield spikes underscores concerns over sustained conflict driving higher defense outlays and fiscal strains.

Commodities broadly reflected safe-haven dynamics, with gold initially rallying over four days before slipping as risk premiums adjusted. Natural gas futures in Europe soared 50% to one-year highs, and overall, commodities have embedded temporary risk premiums that fade as supply resilience is tested, though prolonged fighting could keep prices higher for longer.

Bitcoin dropped sharply in the initial shock, then bounced above 70K before settling a bit today.

As the conflict enters its second week without quick resolution, markets exhibit complacency risks, with volatility returning but US outperformance persisting, tempered by broader economic fragility and potential for deeper global slowdown if energy disruptions intensify.

If the straights of Hormuz can get up and operating and the US can ease energy concerns in Asia and Europe, we may be setting up for a bounce in arch and a move to new all-time highs before the month ends.

Activity in Asia

Across Asia, equity and currency markets saw some of their steepest declines in years. MSCI’s broadest index of Asia Pacific shares outside Japan fell by 1.5%, extending a multi day rout as investors reassessed risk exposure amid intensifying conflict. South Korea’s benchmark index plunged as much as 4.1%, while Japan’s Nikkei dropped 2.3%, underscoring the region’s sensitivity to geopolitical shocks and energy price volatility.

Currency markets were equally unsettled. The Indonesian rupiah, South Korean won, and Thai baht each fell by more than 1%, marking one of the worst sessions for emerging market currencies since late 2024. The selloff was driven largely by a 9% spike in crude oil prices after Iran moved to restrict tanker traffic through the Strait of Hormuz, one of the world’s most critical energy chokepoints.

The U.S.–Israel attack on Iran fundamentally reshaped market sentiment. Tehran’s retaliatory missile launches heightened fears of a broader regional conflict, prompting investors to flee risk assets and seek safety in havens such as gold and

the U.S. dollar. Analysts noted that the conflict has “upended the global economic outlook,” with scenarios ranging from contained escalation to a full scale oil shock that could push prices above $100 per barrel.

For Asia’s emerging markets, many of which are heavily dependent on energy imports, the implications are particularly severe. Higher oil prices threaten to erode trade balances, weaken currencies, and stoke inflationary pressures. Countries like South Korea, whose energy intensive tech manufacturing sectors are central to global supply chains, face disproportionate risks.

In sum, this week’s volatility reflects more than short term market jitters. It underscores Asia’s structural vulnerability to geopolitical shocks and energy market disruptions. As the conflict continues to unfold, emerging markets in the region are likely to remain on edge, navigating a complex landscape shaped by geopolitics, commodity prices, and global risk sentiment. The US has commented on restoring tanker movement through the Strait of Hormuz by providing Naval protection and supplementing insurance on vessels. If traffic can be restored to the region, look for a relief rally across Asia.

Seeking Safe-Havens

Traditional safe haven assets have experienced sharp and immediate movements as investors reassessed geopolitical risk. Gold, the U.S. dollar, and government bonds each responded differently, reflecting the complex interplay between fear, inflation expectations, and global liquidity conditions.

Gold has shown one of the clearest safe haven reactions. As tensions escalated and military strikes were reported, demand for gold increased, pushing prices higher. Analysts noted that safe haven demand surged alongside oil prices, with gold benefiting from investors’ desire to hedge against geopolitical uncertainty and potential supply chain disruptions.  Gold’s rise also aligned with broader market behavior: as equities fell and volatility spiked, investors sought the relative security of precious metals.

The U.S. dollar also strengthened, consistent with its role as a global reserve currency. During the conflict, investors moved into defensive currencies such as the dollar and Swiss franc, reflecting a flight to liquidity and perceived stability.  The dollar’s resilience was further supported by rising oil prices and concerns about

global economic spillovers, which often amplify demand for dollar denominated assets.

Government bonds, however, reacted in a more nuanced way. While U.S. Treasurys typically rally during geopolitical crises, this conflict produced mixed results. Some reports indicated that Treasurys initially attracted safe haven flows but yields later spiked as traders sold government debt amid inflation concerns driven by surging oil prices.  This divergence from the usual “risk off” pattern highlights how inflation expectations can counteract the traditional bond market response to geopolitical shocks.

Also important to note, Bitcoin, hit hard initially, rebounded sharply this past week, rising above the 70K mark, potentially reasserting itself as a store of value in turbulent times. This move will need more time until we can positively confirm this redirection of investor sentiment.

This Week’s Major US Economic Reports & Speakers

Monday, March 9

None scheduled

Tuesday, March 10

6:00 AM NFIB optimism index

10:00 AM Existing home sales

Wednesday, March 11

8:30 AM Consumer price index

8:30 AM CPI year over year

8:30 AM Core CPI

8:30 AM Core CPI year over year

8:30 AM Federal Reserve Vice Chari for Supervision Michelle Bowman speaks about bank supervision

2:00 PM Monthly US federal budget

Thursday, March 12

8:30 AM Initial jobless claims

8:30 AM US trade deficit

8:30 AM Housing starts

8:30 AM Building permits

11:00 AM Federal Reserve Vice Chari for Supervision Michelle Bowman speaks about bank supervision

Friday, March 13

8:30 AM GDP (first revision)

8:30 AM Personal income

8:30 AM Consumer spending

8:30 AM PCE index (delayed report)

8:30 AM PCE (year over year)

8:30 AM Core PCE index

8:30 AM Core PCE (year over year)

8:30 AM Durable goods orders

8:30 AM Durable goods minus transportation

10:00 AM Job openings

10:00 AM Consumer sentiment (prelim)

Disclosures:

All data sourced from Bloomberg as of March 6, 2026, unless otherwise cited.

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