Tensions in the Middle East escalated sharply over the weekend, causing brief volatility in global risk assets and commodity markets at Monday’s opening, before trading became indecisive. Amid heated exchanges between conflicting parties over the weekend and with the 48-hour ultimatum issued by U.S. President Donald Trump set to expire on Monday evening Eastern Time, oil prices surged initially, while U.S. stock futures fell sharply.

After the initial reaction, both oil prices and stock futures recovered some of their losses and are now hovering near flat levels, reflecting deep uncertainty as markets assess the potential duration of the conflict and its economic impact. Following Friday’s decline in U.S. stocks, Asian markets fell sharply on Monday. The Nikkei 225 index widened its loss to 4%, while South Korea’s exchange triggered a circuit breaker on the KOSPI index after KOSPI 200 futures dropped 5%, halting program trading for five minutes. A Goldman Sachs trader noted that markets have begun pricing in inflation risks from a short-lived energy shock but have not yet fully accounted for the downside risks to growth from a prolonged disruption. This contrasts with the energy shock of 2022, as markets currently assume the conflict and energy supply disruptions will be relatively brief. Markets stabilized after a volatile opening on Monday. Over the weekend, the situation in the Middle East shifted sharply from signs of easing to threats of "total destruction." According to reports, on March 21, U.S. President Donald Trump posted on social media demanding that Iran fully open the Strait of Hormuz within 48 hours, warning that otherwise the U.S. would strike and destroy power plants in Iran, starting with the largest one. Early on March 22, Iran’s armed forces warned that if its fuel and energy infrastructure were attacked, all U.S. and allied energy facilities, IT systems, and desalination plants in the region would become targets. Markets reacted strongly at the start of Asian trading. WTI crude briefly rose above $100 but later retreated from session highs. Brent crude also eased slightly from Friday’s peak.

In equity markets, U.S. stock futures fell about 1% to 1.5% from Friday’s after-hours highs early in the session but later pared losses and are now nearly flat. Ten-year U.S. Treasury futures declined, implying a yield increase of about 4 to 5 basis points. Gold held steady near $4,500, while Bitcoin continued to decline over the weekend, falling below $68,000.

Goldman Sachs: Duration of Conflict Is Key According to Goldman Sachs’ analysis, the core market pricing dilemma is that interest rate shocks have been largely priced in, but growth risks remain underappreciated. This differs from the 2022 energy shock, when real yields surged from negative levels, creating a larger negative rate impact.

The market’s current assumption is that the conflict and related energy supply disruptions will be short-lived. If this proves wrong and energy prices remain elevated longer than expected, markets will need to reprice for deeper cuts to global growth and corporate earnings, increasing pressure on global equities. A Bloomberg macro strategist previously noted that rising energy costs act like a tax on consumers, corporate margins, and market confidence. This explains why major central banks have recently signaled a more hawkish stance—markets quickly priced in expectations for tighter policy from the European Central Bank and the Bank of England, while fully removing expectations for Federal Reserve rate cuts this year, with some even betting on a rate hike.

Central banks are keen to avoid repeating the mistakes of 2021 and 2022, when delayed action and misjudged inflation persistence led to aggressive rate hikes. However, with growth slowing and labor markets cooling, tightening policy has become more difficult, especially since financial conditions often tighten even before the first official rate hike.

The Goldman Sachs analyst pointed out that tension is already visible in rate markets: front-end repricing narratives are outweighing clean duration selling, and concerns about policy mistakes are emerging. Hawkish rhetoric can quickly push up two-year yields, but convincing the long end that the economy can withstand a full tightening cycle on top of a sustained energy shock is far more challenging. Strait of Hormuz: The Key Variable in Market Pricing The current situation boils down to one central question: How long will the Strait of Hormuz remain closed? The answer will determine whether oil tankers can pass safely, whether oil flows can return to pre-conflict levels, and the credibility and durability of any ceasefire agreement. The analyst noted that the core challenge of binary risk is that traditional diversification offers little protection—a single exogenous event can repricing all assets simultaneously, making diversification an ineffective hedge. In this context, the analyst recommended that investors shift focus from optimizing allocations to structuring portfolios around outcome scenarios: overweight energy, defense, defensive sectors, and high-quality assets if the conflict persists; overweight high-beta, cyclical, and rate-sensitive assets if a quick resolution occurs; and reduce overall exposure rather than just net positioning, since in a binary risk environment, position management matters more than directional calls. The analyst concluded that binary risk environments reward liquidity and flexibility, not directional accuracy. Investors who perform well in such situations are often not those who correctly call the bottom, but those who hold cash and can act quickly once uncertainty clears. Given that global equity risk premiums are near zero and valuations across regions and sectors are at historically high levels, holding cash is a reasonable asymmetric position—sacrificing little in expected return while gaining significant flexibility.