Market participants are evaluating starkly different scenarios arising from Donald Trump's ultimatum for Iran to reopen the Strait of Hormuz, highlighting how the current impasse represents a critical juncture.
Some investors are reducing positions and increasing cash reserves, concerned about potential widespread damage across the Gulf region if the US and Iran follow through on their threats. Others are positioning for heightened market volatility, anticipating significant price swings irrespective of the final outcome. A smaller group is preparing to purchase assets during any sell-off, banking on Trump's history of brinkmanship that has previously led him to retreat from extreme actions.
The US president's threat to target Iranian power plants if the strategic waterway remains closed past Monday evening in New York has intensified the stakes in a conflict that has unsettled global markets for weeks. For traders, the challenge now extends beyond mere risk management to navigating a complex web of potential consequences.
The impending deadline "carries tremendous significance," stated Michael Brown, senior research strategist at Pepperstone Group in London. "With the stakes being exceptionally high—essentially a choice between de-escalation and major escalation—market participants cannot disregard this looming event."
Financial markets have spent the past month contending with the war's repercussions and its impact on energy supplies. Risks of stagflation have increased, expectations for interest rate hikes have been brought forward, and both stocks and bonds have declined simultaneously. The US dollar has reinforced its safe-haven status, while traders have sought selective opportunities in sectors ranging from defense stocks to renewable energy and Malaysian assets.
Asian equities suffered the most during Monday's decline, falling over 3% for a third consecutive day and approaching correction territory. Bond prices also dropped, while gold surrendered its year-to-date gains amid growing inflation concerns. European stocks are similarly nearing a correction.
For investors already fatigued by rapid market reversals, Trump's deadline is strengthening cautious approaches. Consequently, many are further reducing exposure rather than establishing new positions.
"There is little expectation that Iranian authorities will comply, particularly after issuing counter-threats against regional infrastructure assets," commented Jon Withaar, portfolio manager at Pictet Asset Management. The fund is implementing index-level hedges in Japan where a "buyer's strike" is currently occurring, he noted.
Reducing Exposure
Oil traders have largely absorbed the latest threats, choosing to await tangible developments before making significant moves. With Brent crude already near its highest levels since mid-2022—having risen over 50% since strikes began against Iran in late February—verbal escalation currently has limited impact, according to Stefano Grasso, a former physical energy trader now serving as senior portfolio manager at Singapore-based 8VantEdge Pte.
"The market has reached a point of rhetorical saturation where destruction threats are already factored into triple-digit prices," Grasso observed. "Traders will remain cautious until the deadline passes and we see whether this represents an actual policy shift."
The crucial question for fund managers approaching the deadline is which party will concede and how this will affect oil markets, which have been the primary source of shockwaves across asset classes.
Hedge funds have been reducing or hedging currency exposures since the conflict began, as uncertainty leaves foreign exchange positions vulnerable to news developments. In rates markets, curve steepener trades faced significant pressure last week following oil's surge above $100 per barrel.
Market participants have subsequently priced in four potential rate increases from the Bank of England this year, while sources indicate the European Central Bank could raise rates at its next meeting. Traders are also increasing bets on Federal Reserve rate hikes, pricing in 20 basis points of tightening by year-end.
"We began consistently reducing longer-maturity fixed income exposures when the conflict started and will continue adjusting based on price action," stated Massimiliano Bondurri, CEO of SGMC Capital Pte Ltd in Singapore. "Overall, fixed income appears unattractive at current credit spreads. We prefer reducing exposure and awaiting future entry opportunities."
Collectively, global equity markets have lost approximately $11.5 trillion since the Iran conflict began, a decline comparable to the $12.2 trillion drop during the turbulence following Trump's implementation of country-specific tariffs a year ago. During this period, global bond values have decreased over $2.5 trillion, while the Bloomberg Dollar Index has gained more than 2%.
Giorgio Pradelli, CEO of private bank EFG International, noted that volatility trading has become a key theme among clients. He added that structured products are also receiving attention as investors seek to profit from increased market fluctuations.
"We entered this conflict with long positions in shipping, power, gas, and single stocks since late January," said Chauwei Yak, CEO of multi-strategy hedge fund GAO Capital in Singapore, noting the firm now maintains 10% to 12% of assets in cash.
However, Yak is monitoring buying opportunities in specific sectors including Japanese banking, shipping, and metals refining "under the assumption that the conflict will eventually conclude," she remarked.
Indeed, for many investors, the possibility of a sudden conflict resolution triggering another dramatic market reversal represents an equally important consideration.
"This represents a highly binary event," commented Bhanu Baweja, chief strategist at UBS AG. "In equities, the market maintains a 'recovery imminent' mindset. Repeatedly, buying during dips has proven profitable, with Liberation Day serving as the prime example."
Kensuke Togashi, chief strategist at Daiwa Asset Management, indicated his firm is "shifting from high-momentum stocks to underperformers," though he considers a prolonged conflict more likely than sudden improvement.
This dilemma captures the sentiment among numerous market participants.
"Making decisive moves proves challenging," said Taku Ito, chief portfolio manager at Nissay Asset Management. "We must account for both potential outcomes."
