Oil prices surged on Monday following a US move to block the critical Strait of Hormuz, triggering a familiar market response that also included rising bond yields and a stronger US dollar. However, the overall market reaction was notably restrained beyond the volatility in crude prices. Equity markets saw relatively limited declines, suggesting investors have already priced in a significant portion of the geopolitical risk and are becoming less sensitive to news events.

Commenting on the situation, investment strategist Billy Leung of Global X ETFs stated, "The market broadly views this more as a negotiation tactic. Market uncertainty has peaked, and the reaction mechanism is no longer as extreme as before." Asian stock markets generally trended lower on Monday, but the moves were noticeably moderate, with major benchmark indices falling by around 1%. Futures for major US stock indexes also declined by less than 1%.

Meanwhile, spot gold prices fell approximately 0.5% to $4,720.28 per ounce, while the US Dollar Index rose 0.38%. A stronger dollar makes dollar-priced gold more expensive for holders of other currencies, dampening its appeal. Leung noted that recent market movements indicate investors are growing accustomed to geopolitical shocks, with market volatility weakening compared to previous weeks. "Therefore, I believe the market now has a more rational pricing and clearer understanding of the motivations at play," he said.

Echoing this sentiment, Jun Bei Liu, Chief Portfolio Manager at Ten Cap, suggested that volatility indicators show the peak of panic may have passed. "We saw the VIX index rise a few weeks ago, which was likely the peak of panic and selling... From here, the market will truly enter a phase of self-adjustment."

A key short-term risk, however, lies in the political timeline related to US military actions. Leung pointed to the War Powers Resolution, which effectively sets a limited time window for the administration to seek congressional approval. "In the coming weeks, we will see increasing urgency from the administration," he added, noting that the market may not have fully appreciated this constraint. Reports indicate US lawmakers are again seeking to pass a resolution to halt war efforts and force the administration to seek congressional approval before further military action.

The US blockade of the Strait of Hormuz—where transit volume has significantly decreased since the onset of conflict with Iran—has reinforced expectations of tightening energy supplies, pushing crude prices higher and exacerbating global inflation concerns. These inflation worries have also cast a shadow over expectations for interest rate cuts, contributing to higher bond yields, a stronger dollar, and weaker equities.

Since the conflict began, the yield on the 10-year US Treasury note has risen by over 333 basis points, while the US Dollar Index has gained approximately 1.4%. US oil prices have surged more than 55% over the same period. At the time of writing, US crude futures for May delivery were up about 8% to $104.03 per barrel, while Brent crude futures for June delivery rose to $101.79 per barrel.

Analysts anticipate that although near-term volatility may persist, oil prices are likely to eventually retreat as geopolitical tensions stabilize. Michael Yoshikami of Destination Wealth Management expressed confidence, stating, "I am fairly certain oil prices will pull back from here... We will see oil return to $80 per barrel again." He expects a negotiated solution between the US and Iran, which could quickly remove the current risk premium.

Steve Brice of Standard Chartered noted that rising oil prices have delayed the potential for monetary policy easing, thereby putting upward pressure on bond yields and the dollar. "However, we view these as temporary phenomena because we believe the US is seeking pathways to de-escalate the situation."

Gold's trajectory has been harder to predict, with prices falling despite heightened geopolitical tensions. Brice attributed this to emerging market central banks selling gold to stabilize their currencies but expects gold demand to recover if Middle East tensions ease.

Currently, the market appears to be balancing elevated geopolitical risks against expectations that the conflict will ultimately de-escalate, reacting with relative calm to recent developments. Brice stated, "We believe positioning in equity markets supports a rebound. Therefore, as long as the situation does not materially worsen, equities should continue to recover in the near term." He added that although the macroeconomic backdrop remains relatively favorable, investor positioning is still defensive, implying room for a market rally once the conflict begins to subside.

This creates a nuanced environment for investors: geopolitical shocks remain significant but no longer trigger the same degree of panic selling seen in the initial stages of the conflict. Yoshikami concluded, "It's no longer a simple binary outcome. For the foreseeable future, the market will be in a grey area."