Bank of America's Chief Investment Strategist Michael Hartnett suggests that domestic political pressure in the United States will compel a de-escalation of the Iran conflict by March. Should tensions ease, investors should sell crude oil and the US dollar while purchasing 30-year US Treasury bonds, with risk assets potentially bottoming out and rebounding in March. Current surges of 45% in US oil prices and 15% in gasoline prices have driven down President Trump's approval ratings on economic management to 40% and on inflation handling to a low of 36%. Hartnett argues that the Iran conflict is politically unsustainable, and Trump must reverse the situation before the midterm elections, indicating a window for de-escalation in March. If the situation cools, Hartnett provides clear trading guidance: sell crude oil at price levels around $90 per barrel, sell the US dollar when the DXY index is above 100, and buy 30-year US Treasuries at a yield level of 5%. Concurrently, risk assets are expected to find a bottom in March. In early Monday trading, Brent crude oil approached the $120 mark before retreating, currently quoted at $107 at the time of writing.

Hartnett also notes that if the conflict escalates, the US would ensure oil supply and maintain its dominance in AI technology. In such a scenario, crude oil, the US dollar, US tech stocks, and the defense sector would outperform. Oil-importing nations like South Korea, Japan, and Europe would face pressure, with particular vulnerability for the banking sectors in Japan and Europe, which risk significant pullbacks.

The political countdown: Midterm election pressures are dictating the pace of the conflict. Hartnett's core logic is based on a pragmatic political assessment: Trump's political foundation is being directly eroded by rising oil prices. His current approval ratings on economic issues have fallen to 40%, and his rating on inflation is even lower at 36%, both at low levels. Simultaneously, US oil prices have increased by 45% since the conflict began, with retail gasoline prices up 15%, directly transmitting inflationary pressure to ordinary voters. From Hartnett's perspective, this makes a prolonged Iran conflict politically untenable. The practical pressure of the midterm elections requires Trump to reverse this situation. A recovery in Trump's approval ratings before the second quarter is a prerequisite for risk assets to gain upward momentum.

De-escalation trade: Sell oil, sell the dollar, buy long-term bonds. Hartnett believes that de-escalation in Iran will trigger the following trading logic: sell crude oil at around $90 per barrel, sell the US dollar when the DXY is above 100, and buy 30-year US Treasuries at a 5% yield level, while risk assets may bottom in March. He also emphasizes that a "short war" would reactivate the bullish narrative for assets that benefit from inflationary booms: commodities and emerging market small-cap stocks would gain from a resumption of a bear market in the US dollar. However, Hartnett remains cautious about a broad market rebound. He notes that for new stock market highs to occur, three conditions must be met: a significant buildup of short positions, a panicked policy shift, and a reversal in peak liquidity expectations. Currently, none of these conditions are mature, and the S&P 500 has not yet undergone sufficient price clearing (such as falling below 6600 points), with overall market positioning still leaning long.

Escalation trade: Oil, the dollar, and US tech stocks would benefit. Hartnett clearly outlines an alternative path: if the Iran situation escalates instead of cooling, the asset allocation logic would fundamentally reverse. In an escalation scenario, with the US fully intervening to ensure oil supply security and support energy needs for AI infrastructure, the benefiting assets would shift to: crude oil, the US dollar, US technology stocks, and the global defense sector. The cost would be borne by oil-importing countries, including South Korea, Japan, and Europe. Hartnett specifically highlights that, in an escalation scenario, the highest risks lie with Japanese and European bank stocks. These sectors were previously seen as core beneficiaries in the current market trend.

The US dollar is the key barometer: DXY breaking 100 signals a global liquidity turning point. Hartnett provides a framework for a "correction conclusion": when exogenous shocks combine with excessive optimism, three conditions typically need to be met: "oversold assets bottom out," "overbought assets are sold off," and "safe-haven assets lose buying interest." In his view, signs of the first two price actions have emerged, but oil and the US dollar remain crucial for giving the 'all-clear signal'. Among all variables, Hartnett identifies the US dollar as the most critical asset to watch currently, describing the dollar exchange rate (DXY index) as the "best barometer of global liquidity." He believes that if the DXY breaks above 100, it would indicate that the peak of the global central bank interest rate cutting cycle has arrived. Market expectations for a Fed rate cut on June 17, which were as high as 100% on January 1, have now fallen to 37%. Additionally, a stronger dollar would lead to a flattening yield curve and potential inflationary shocks. This framework implies that the direction of the US dollar is not just a currency signal but a core indicator for judging the turning point in global liquidity, the Fed's policy path, and whether risk assets can truly stabilize.