Global investors are weighing the starkly different potential outcomes stemming from U.S. President Donald Trump's demand for Iran to reopen the Strait of Hormuz. These significant possibilities, alongside current market pricing trends, highlight that the latest large-scale military standoff between the U.S./Israel and Iran is approaching a critical juncture. Following Trump's major social media announcement of a "five-day delay," markets began cheering the arrival of a "TACO moment." However, Wall Street institutions like Goldman Sachs suggest the true bottom has not yet been reached, indicating the market remains torn between short-term bets on Trump stepping back and long-term fears of a prolonged war. Meanwhile, the crowded trade in AI super-cap stocks may still be the last source of liquidity for markets to sell for cash.
Amid a full-scale escalation of Middle East geopolitical tensions, an atmosphere of "extreme fear" has swept across every corner of the global financial markets. Asian stocks collectively plunged on Monday, warranting the description "Black Monday," with Japanese and South Korean markets leading the sharp declines. Copper prices fell to their lowest in over three months, spot gold dropped nearly 9% intraday, erasing all its gains for the year, and spot silver fell almost 8% intraday.
As the military conflict between the U.S./Israel and Iran entered its fourth week on Monday, Trump's "final 48-hour ultimatum" entered its countdown phase. However, rhetoric from both sides suddenly hardened. Bitcoin, often seen as a barometer for risk assets, declined alongside global stocks, bonds, and gold. The dual shock of rising inflation expectations from soaring oil prices and a worsening economic growth outlook is forcing investors to reassess the monetary policy paths of the U.S. Federal Reserve and other major global central banks, with market sentiment increasingly turning defensive.
Yet, after the close of Asian trading on Monday, during the early European session, Trump's latest social media post reignited market risk appetite. President Trump posted on the social media platform Truth Social that "the U.S. and Iran have had very good and productive conversations over the last two days." Trump stated he had directed a halt to all military strikes on Iranian power plants and energy infrastructure for five days, contingent on the success of ongoing meetings and discussions.
The broader retreat in global stocks and other risk assets during the Asian session was primarily due to intensifying Middle East tensions over the weekend. President Donald Trump threatened to bomb Iran's core power infrastructure, including its largest facility, unless Iran reopened the critical Strait of Hormuz global trade waterway. Tehran responded with a warning that it would strike key infrastructure across the Middle East if its fuel and energy assets were attacked by the U.S. and Israel. In response, Iran's Defense Committee issued a statement on Monday declaring that if enemy forces attack Iranian coasts or islands, Iran would immediately deploy various types of sea mines across all shipping lanes in the Persian Gulf.
A spokesperson for Iran's Khatam al-Anbiya Central Headquarters stated that due to precise strikes and strategic deployments by Iranian armed forces, the multi-layered U.S./Israeli defense network in West Asia has collapsed, weapons supply systems have been disrupted, and the overall war situation is shifting. Iran has effectively imposed a "quasi-blockade" on the Strait of Hormuz, obstructing about 20% of global energy flows, accompanied by tanker attacks and shipping disruptions. A recent International Energy Agency (IEA) study indicated that the late February U.S. and Israeli military actions against Iran triggered the largest supply disruption in global oil market history. Concurrently, the U.S. government is considering military options, including potential ground or quasi-ground control of Kharg Island, to restore shipping channels and fully control the Strait of Hormuz.
Brent crude has been hovering and stabilizing near $110 per barrel, suggesting high oil prices may be a persistent major threat that investors, central bankers, and corporate leaders must confront. Kharg Island is Iran's largest crude oil export terminal, accounting for 90% of its exports.
Following Trump's "ultimatum," investors began modeling the most likely Iran risk scenarios: Has the "TACO moment" arrived? Some professional institutional investors are reducing exposure and raising cash holdings, fearing broader damage to infrastructure, including oil and gas facilities, in the Gulf region if the U.S. and Iran act on their extreme military threats. Other investors are positioning for sustained high volatility itself, anticipating sharp market swings regardless of the outcome. A smaller group is preparing to actively implement a dip-buying strategy, betting on Trump's habitual pattern of brinkmanship—the TACO strategy—which has previously seen him soften his stance or withdraw before taking extreme action.
TACO (Trump Always Chickens Out): This strategy originated in April 2025 during Trump's unprecedented "reciprocal tariffs" campaign. The TACO strategy is now widely adopted by traders as a popular approach. Whenever Trump issues new, more aggressive tariff threats or other major warnings causing market plunges, investors bet he will ultimately retreat or that implemented policies will be significantly weaker than his rhetoric, leading them to buy the dip aggressively, betting on a substantial market rebound shortly thereafter. Based on Trump's latest statement pausing military strikes, a "TACO moment" appears to have arrived.
Trump had repeatedly threatened to strike Iranian utility infrastructure if the waterway was not reopened by Monday evening New York time, escalating risks in a geopolitical conflict that has already roiled global markets for weeks. For professional Wall Street traders, the challenge is no longer just managing risk but modeling a dizzying array of follow-on effects. Michael Brown, Senior Research Strategist at Pepperstone Group in London, said this deadline is "critically important." "Given the high stakes—essentially a binary outcome of either de-escalation or major escalation—market participants simply cannot ignore this massive, looming risk on the horizon," he stated.
Over the past month, financial markets have struggled to digest the consequences of this geopolitical war and its associated energy supply crisis. Notably, stagflation risks have risen sharply, rate hike expectations have been brought forward, and stocks and bonds have sold off simultaneously. The U.S. dollar has reasserted its safe-haven status, while equity traders have sought selective opportunities in defense stocks, renewable energy, and Malaysian energy assets.
On Monday, Asian markets bore the brunt of the sell-off, with the MSCI Asia Pacific Index falling over 3% and approaching a technical correction. Global bond markets also fell sharply due to heightened stagflation fears from persistently high oil prices, while gold erased more than half of its year-to-date gains amid rising inflation and stagflation concerns. European stocks also moved towards a significant correction on Monday, but rallied collectively after Trump's announcement of the five-day pause, with WTI and Brent crude prices extending losses.
For investors already exhausted by rapid reversals, Trump's ultimatum and contradictory rhetoric have reinforced their cautious stance. Consequently, many are further reducing exposure rather than chasing new positions. Jon Withaar, Portfolio Manager at Pictet Asset Management, said, "Nobody is confident that the Iranians will back down on this, especially after they have issued counter-threats against infrastructure assets in the region." He mentioned the fund is increasing index-level hedges in Japan, where "buying power is on strike" currently.
Stick to cutting positions or respond to the "TACO dip-buying" faith? Goldman Sachs says the true market bottom phase has not yet arrived. Commodity traders focused on oil have remained relatively calm regarding the latest threats, choosing to wait for actual changes on the ground in the Middle East before making major moves. Stefano Grasso, Senior Portfolio Manager at Singapore-based fund 8VantEdge Pte and a former energy trader in commodity markets, noted that Brent crude is near its highest closing level since mid-2022, up over 50% since the strikes on Iran began in late February, so verbal escalation has little impact at this point. "The market has reached a state of verbal saturation; threats of 'total destruction' are already priced into triple-digit oil. Traders won't act rashly again unless this 48-hour countdown concludes and we see if it represents real change," Grasso said.
For fund managers facing the looming deadline, the biggest question is who will blink first and what impact that will have on the oil market, which has been the epicenter of this cross-asset shockwave. Since the war began, hedge funds have been reducing or hedging existing FX positions as uncertainty makes them hostage to news headlines. In rates and U.S. Treasury markets, the yield curve steepening trade came under significant pressure last week as oil surpassed $100 per barrel. Conversely, market participants have started pricing in the possibility of four Bank of England rate hikes this year, and sources suggest the European Central Bank could hike as soon as its next meeting. Traders are also increasing bets on Fed rate hikes, with pricing reflecting an additional 20 basis points of tightening by year-end.
Massimiliano Bondurri, CEO of SGMC Capital Pte in Singapore, said, "We have been consistently reducing longer-duration fixed income exposure since the conflict began and will continue to do so based on price action. Overall, fixed income is not attractive at current credit spreads. We prefer to reduce positions first and wait for better entry opportunities in the future."
Overall, since the Iran conflict erupted, global stock market capitalization has evaporated approximately $11.5 trillion, a drawdown comparable to the roughly $12.2 trillion decline during the turmoil a year ago when Trump rolled out aggressive reciprocal tariffs country by country. Over the same period, global bond market value has fallen by over $2.5 trillion, while the Bloomberg Dollar Index has risen over 2%. Giorgio Pradelli, CEO of private bank EFG International, said one key theme clients are focusing on is trading volatility. He added that structured products are also coming into focus as investors seek to capitalize on major trading opportunities from heightened market volatility.
Chauwei Yak, CEO of Singapore-based multi-strategy hedge fund GAO Capital, said, "Since late January, we have held long positions in shipping, long power, long natural gas, and long single-stock volatility throughout this war." She mentioned the firm currently holds about 10% to 12% of its assets in cash. However, Yak is also looking for dip-buying opportunities in certain stocks, including Japanese bank stocks, shipping stocks, and metal refiners, "assuming this war will end one day," she added.
Indeed, for a large portion of investors, the possibility of the conflict ending abruptly and triggering another sharp reversal is also a key consideration. Bhanu Baweja, Chief Strategist at UBS Group, stated, "This is a very binary event. In the equity market, it's still a 'things will get better soon' type of trade. And time and again, buying the dip has been rewarded, with 'Liberation Day' being the best example." Kensuke Togashi, Chief Strategist at Daiwa Asset Management, said the firm's strategy is "rotating from high-momentum stocks to laggards," although he believes the conflict is more likely to drag on than see sudden improvement. This dilemma reflects the mindset of many investors. Taku Ito, Chief Portfolio Manager at Nissay Asset Management, said, "It's difficult to take action. We have to consider both possibilities simultaneously."
According to Wall Street giant Goldman Sachs, the U.S. stock market has entered a de-risking phase but is far from the "capitulation selling" required for a true market bottom. Signals like the breach of the 200-day moving average, negative Gamma, insufficient sentiment reset, and systemic funds not fully unwound already indicated market fragility. Now, an even more dangerous exogenous variable is added—Trump's "ultimatum" to Iran pushes the market back into a binary "either de-escalation or major escalation" scenario.
In this environment, Goldman Sachs strategists view the AI complex / Mag 7 as the "last source of selling." The logic is robust: after cyclical stocks, financials, and Asian risk assets have already been cut, the most crowded trade in the market, with the largest unrealized gains and easiest to liquidate quickly for margin calls or risk reduction, is often the AI super-caps and large-cap tech stocks. Over recent months, the market has repeatedly demonstrated the "crowded long" nature of the AI trade. Goldman Sachs noted that AI-driven tech stock selling previously caused the worst single-day performance for equity hedge funds in nearly a year. Simultaneously, investors have questioned whether massive AI capital expenditure can support current valuations this year. In other words, the AI sector is not the cheapest after falling first; it is the most likely source of liquidity to be sold in the next round. Its transition from a "growth belief" to a "funding tool" is the key warning in Goldman's report.
From Goldman's strategists' perspective, the market's dominant narrative is shifting from a singular AI computing power bull market to a harsher macro reality check: if the Strait of Hormuz risk does not subside and oil prices remain above $100 for longer, high-valuation tech stocks will face simultaneous pressure from higher discount rates, downward earnings revisions, and deleveraging of positions. In such a phase, any rally is more likely a tactical bounce than a strategic reversal. Goldman's latest view essentially states that this is not the "everyone is绝望" bottom, but the stage where "people start realizing what's left to sell." And the most obvious, concentrated selling pool is precisely the AI super-giants.
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