Since the escalation of tensions involving Iran on February 28, the conflict has entered its fourth week with no signs of de-escalation. Instead, the situation continues to intensify. Unless the conflict is expected to persist into the third or fourth quarter, current market expectations reflected in U.S. Treasury bonds and gold appear overly pessimistic, suggesting potential value in taking long positions. Conversely, if concerns grow that the conflict will extend into the second half of the year, U.S. equities, which currently reflect insufficient risk pricing, may face correction pressures. A-shares and H-shares would also be impacted by sustained high interest rates, particularly growth-oriented stocks.

At the sector level, a prolonged escalation of tensions involving Iran could first affect market expectations for export-oriented sectors due to fears that high oil prices may trigger an economic downturn. This would be followed by impacts on cyclical sectors, as demand-side shocks precede supply-side concerns, and finally affect technology sectors due to valuation pressures. In such a scenario, only U.S. dollar cash, short-term bonds, and defensive segments within the A-share market may serve as effective hedges. These include low-volatility dividend stocks, consumer and property sectors with modest expectations, and low-priced stocks that have either already corrected or carry low valuations and positioning.

Key observations since February 28 include the continued "substantive" blockade of the Strait of Hormuz and direct Israeli strikes on Iran’s key energy infrastructure, which have exacerbated disruptions in global energy markets. Brent crude prices have risen above $110 per barrel, while TTF natural gas prices surged 13% in a single day. Market volatility has intensified alongside geopolitical risks and energy concerns: gold prices fell 15%, the 10-year U.S. Treasury yield climbed to 4.4%, and equity markets in the U.S., mainland China, and Hong Kong experienced heightened fluctuations. U.S. bond volatility reached its highest level since April 2025.

Market expectations for the conflict’s duration have shifted from initial assumptions of a quick resolution toward a prolonged standoff. According to Polymarket odds, the probability of the conflict ending in March dropped from 78% on February 28 to just 4% by March 20. The highest probability is now assigned to a resolution between April 1 and May 15.

Using Federal Reserve rate-cut expectations as a benchmark, divergent pricing across asset classes reflects both risks and opportunities. Under a baseline scenario without geopolitical disruptions, U.S. inflation would peak at 2.8% in the second quarter before declining, allowing the Fed to cut rates two to three times. However, if oil prices remain above $100 per barrel, inflation could peak at 3.5%, matching the current federal funds rate range of 3.5–3.75%, thereby delaying rate cuts. Each 10% increase in oil prices raises U.S. CPI by approximately 0.2–0.3 percentage points. Under a scenario where Brent crude reaches $120 per barrel in Q2 before moderating to $80–90 in Q3 and Q4, headline CPI would peak around 4.6% in Q2 before falling to 2.8–3.2% due to base effects and lower energy prices. This would still allow rate cuts in the second half of the year. However, if oil prices stay above $100 through Q3 and Q4, inflation could remain above 3.5%, preventing any rate cuts in 2025.

Asset-specific expectations vary significantly. Copper, gold, and U.S. Treasuries reflect a "no rate cuts in 2025" scenario, while equity markets remain relatively optimistic. Copper prices have declined 10.6–12.4% since late February, with the copper-oil ratio falling to 103, near its decade average, indicating priced-in demand concerns. Gold prices dropped 15% to below $4,500 per ounce, with the gold-oil ratio retreating to 40. Both metals imply slight tightening expectations. The 10-year Treasury yield rose 44 basis points to 4.38%, driven largely by real rate increases and repricing of the Fed’s rate path. Futures now imply the first rate cut only in September 2027.

U.S. equities have shown relative resilience, supported by earnings revisions and expectations of policy support. However, if tensions persist, equities could correct by up to 10%, with 3–4% from valuation compression and 6–7% from earnings downgrades. In China, Hong Kong stocks and A-share growth sectors like the STAR 50 index are more vulnerable to U.S. rate and dollar strength. While major A-share indices have been relatively stable, sectors such as chemicals and transportation face earnings pressure if oil prices remain elevated.

A sustained oil price above $100 would also bolster the U.S. dollar, as higher inflation expectations delay Fed easing and liquidity tightening boosts demand for dollar cash. In a stagflationary scenario reminiscent of the 2022 Russia-Ukraine conflict, the dollar could maintain strength due to the relative resilience of the U.S. economy.