Market concerns have shifted from simple supply-demand dynamics to the impact of geopolitical risks on supply chains. Escalating tensions in the Middle East are roiling global markets, intensifying asset price volatility and significantly raising fears of stagflation. Over the past two weeks, major asset classes including crude oil, gold, and equities have experienced sharp fluctuations, with their performances diverging markedly. International oil prices briefly surpassed $100 per barrel and have since remained volatile at elevated levels, posting a near 80% gain year-to-date. Despite heightened risk aversion, gold has fallen instead of rising, declining nearly 10% over the past month. Asia-Pacific stock markets are under broad pressure, with major indices in Japan and Korea dropping more than 7% this month.
Simultaneously, global markets are experiencing a "super central bank week." On March 18, the Federal Reserve announced it would maintain the federal funds rate in the 3.50% to 3.75% range. Central banks in other major economies such as Japan and Canada also opted to hold rates steady. Although policy rates were left unchanged, several central banks noted in their statements that rising geopolitical uncertainty poses risks to both inflation and growth prospects.
Industry experts suggest that as worries over energy supply security intensify, risks to shipping through the Strait of Hormuz are being quickly factored into oil prices, lifting inflation expectations. These effects are then transmitted to various assets through interest rate and exchange rate channels. Market anxiety has clearly transitioned from pure supply-demand concerns to the disruptive impact of geopolitical threats on supply chains.
Markets have entered a phase of high volatility. The origin of this round of turbulence lies in the energy markets. Since March, international oil prices have remained volatile at high levels. After briefly exceeding $100 per barrel early in the month, WTI crude has retreated to $96.41 per barrel at the time of writing, still up nearly 68% year-to-date. ICE Brent crude is hovering around $108 per barrel, having gained almost 50% this month and nearly 80% year-to-date. Such rapid price increases reflect a market reassessment of supply risks.
Oil price movements show distinct event-driven characteristics. Early last week, signals from the U.S. suggesting a potential de-escalation of conflict led to a temporary dip in prices. However, subsequent statements from Iran indicating no intention to cease hostilities prompted markets to quickly revise expectations, pushing prices higher again. Institutions widely believe the market's focus has shifted from pure supply-demand dynamics to the impact of geopolitical risks on transportation and supply stability.
In this context, the Strait of Hormuz has become a critical variable. This passage handles approximately 19% of global oil shipments. Any disruption could directly drive up energy prices and transmit inflationary pressures across asset classes. HSBC China notes that even short-term disruptions are sufficient to cause significant oil price volatility, and the market has not yet fully priced in this uncertainty.
Rising oil prices are quickly boosting inflation expectations, constraining the path of monetary policy. Concurrently, a stronger U.S. dollar and marginally tighter liquidity conditions have prevented gold, a traditional safe-haven asset, from extending its previous rally. Instead, it has undergone a notable correction. On March 19, international gold prices fell to $4,747.5 per ounce, declining approximately 9.5% for the month and breaking a seven-month winning streak. Silver has fallen even more sharply, dropping over 20% this month.
This performance contrasts with historical patterns where gold typically rises amid geopolitical conflicts. Market analysts attribute this divergence to the dominant influence of interest rate and liquidity factors in the current macroeconomic environment. On one hand, higher oil prices boost inflation expectations, reducing market expectations for Fed rate cuts. On the other hand, liquidity strains in the U.S. private credit market have strengthened demand for the U.S. dollar, keeping the dollar index near 100. "Gold is facing short-term pressure due to the dual impact of rising real interest rates and a stronger dollar," said Qu Rui, Senior Associate Director of Research and Development at Oriental Jincheng.
The equity market correction results from a combination of rising inflation expectations, a reassessment of the interest rate path, and declining global risk appetite. On March 19, major Asia-Pacific stock indices closed lower collectively. The Nikkei 225 fell 3.38% on the day, bringing its monthly decline to 9.31%. The KOSPI dropped 2.73%, falling 7.7% for the month. Saudi Arabia's market has declined 14.66% this month. Globally, equity markets are shifting from previous structural divergence towards synchronized adjustment.
Institutional analysis suggests Asian markets are more sensitive to oil prices. Manulife Investment's Asia Equity and Fixed Income teams indicated that stock markets in energy-import-dependent economies like South Korea, India, and the Philippines may face near-term pressure. In contrast, energy-producing economies like Malaysia and Indonesia show relative resilience. Overall, however, Asian market performance will depend on how long oil prices remain high and whether energy transportation is disrupted.
Amid this asset repricing, discussions about stagflation have intensified. The Chief Investment Officer at Citibank stated that surging oil prices are exacerbating global stagflation risks—a scenario combining rising inflation with slowing growth. Amid rising uncertainty, investors are refocusing on high-quality growth assets.
Nevertheless, some argue that the current environment does not yet constitute typical stagflation. Mou Yiling, a strategist at Guojin Securities, pointed out that as renewable energy develops, oil's share in the global energy mix continues to decline, reducing its economic impact compared to historical levels. Even if oil prices rise, they would need to reach extreme levels to replicate historical stagflation shocks. Major global economies are still in a recovery phase, and the current asset price adjustments reflect more of a repricing of valuations and expectations.
Subtle shifts in policy are adding new uncertainties. On March 18, the Fed held rates steady as expected, maintaining the federal funds rate target range at 3.50%-3.75%. However, its statement mentioned Middle East geopolitical uncertainty for the first time. Bai Xue, Senior Associate Director of Research and Development at Oriental Jincheng, noted this indicates geopolitical risks have evolved from peripheral factors to important policy influences. The Fed has entered a cautious wait-and-see phase, with less room for rate cuts within the year.
UBS Global Wealth Management released a report suggesting that, although policy rates were unchanged, the overall tone remains accommodative. It expects the Fed might begin cutting rates by mid-2026. However, with rising inflation expectations, markets have further delayed their projected timing for rate cuts. Standard Chartered noted that while rising oil prices push inflation higher, they could also suppress economic growth, complicating the policy outlook.
Policy directions among other major central banks are diverging. The Reserve Bank of Australia raised rates by 25 basis points, emphasizing inflation risks. Bank Indonesia removed language hinting at potential rate cuts, signaling a shift towards caution. The Bank of Japan kept its policy rate unchanged at 0.75%, but the rate decision vote revealed disagreements over pressures stemming from the Middle East conflict. Overall, amid intertwined geopolitical conflict and inflation pressures, global monetary policy is transitioning from an easing cycle to a观望 stance.
Looking ahead, many institutions believe market trends will remain highly dependent on developments in the Middle East, particularly shipping conditions in the Strait of Hormuz. HSBC China expects that, under a baseline scenario, conflict may persist for weeks but is unlikely to completely halt energy transportation. Oil prices will likely remain volatile at high levels, potentially retreating to around $77 per barrel after six months as risk premiums gradually fade.
Yang Chao, a strategist at China Galaxy Securities, warned that if conflicts prolong, risk premiums related to energy transport could persist, leading to a global macro environment characterized by low growth, high interest rates, and high volatility. Should conflicts escalate and disrupt transportation, imported inflation could intensify stagflation risks.
Despite short-term volatility, institutions maintain a rational outlook on medium- to long-term asset prospects. UBS Global Wealth Management stated that historical data show markets often deliver solid returns in the year following periods of high volatility. Long-term holding strategies remain attractive, provided portfolios are well-diversified.
Regarding specific allocations, several institutions recommend reducing concentration in single assets and enhancing portfolio resilience. For equities, they suggest diversifying sector and regional exposures, focusing on high-quality companies with strong profitability and cash flow. In fixed income, investment-grade bonds may find support from safe-haven demand, while high-yield bonds could face pressure.
As for gold, despite near-term pressure, it is still viewed as an important hedge against geopolitical risks and currency fluctuations. Standard Chartered advises gradually increasing gold holdings during price pullbacks, while using inflation-protected bonds to hedge against inflation risk.
Alternative asset allocations are also gaining attention. UBS believes hedge funds and private markets, due to their low correlation with traditional assets, can enhance portfolio stability. In the current volatile environment, some investors might use structured products to participate in potential market gains while controlling downside risks.
HSBC China proposes a "barbell strategy": allocating to high-growth areas like artificial intelligence and technology on one end, while holding high-dividend assets and quality bonds on the other, to balance risk and return in an uncertain environment.