Weekly Market Update

This escalation of conflict is a departure from the flare-ups last April and October, which were signaled in advance. While we are concerned that this phase may be the beginning of a sustained conflict in the region, market pricing of geopolitical risk has historically been short-lived.

However, if oil flows are significantly and sustainably disrupted, the global impact could be meaningful. Over the past 50 years, the Brent crude oil price has surged nearly 5% in the five trading days following geopolitical events in oil-sensitive regions, but these moves typically reverse in a matter of weeks.

Today, OPEC+ has close to 4 million barrels per day of spare capacity — mostly in Saudi hands — which could theoretically offset a drop in Iranian supply.

But the real risk is the closing of the Strait of Hormuz, a chokepoint which roughly 20 million barrels — or 20% of global oil consumption — passes through daily. Although not our base case, any interruption in oil transportation through the Strait would trigger a major shock to both markets and supply chains.

US Treasury bond yields and the US dollar remained anchored on the news, defying their traditional role of rallying sharply as “safe haven” assets.

These muted reactions confirm investor hesitancy to rely on historic asset correlations to hedge portfolios.

To us, longer-term bonds appear reluctant to break meaningfully below these short-term yield levels despite favorable May inflation data released this week, successful refinancing auctions of both the 10y and 30y, and presumably some “flight-to-safety" buyers due to this new Middle East conflict.

The combination of tariff-driven price increases keeping inflation firm, and the likely deficit-enhancing US budget bill will require investors to demand additional levels of income for holding longer-dated bonds or increasing the “term premium.”

As a result, we see rates as upwardly biased, and we remain on pause in adding additional duration to portfolios despite the recent rally in rates.

Global equities are lower since Thursday evening, but the selloff has initially been relatively mild.

Assuming the Israel-Iran conflict doesn’t spiral into a wider regional war, we expect equity investors will soon refocus back on trade and underlying US economic health.

Lackluster equity performance following this week’s constructive talks between the US and China are a signal to us that new trade deals may be losing their potency as drivers of new rallies.

We are also wary that sector tariffs could be announced at any point. Escalation of hostilities in the Middle East on top of tariff uncertainty keeps us on the sidelines from adding to risk at these market levels. We prefer to maintain our neutral positioning across global equities.

While initial price action may fade over time in line with historic geopolitically tense moments, the conflict escalation between Iran and Israel adds further caution to our stance on risk right now.

While tariff pain has yet to fully filter into corporate and economic data, the continuing jobless claims figure for this week reached the highest level since November 2021 and bears watching for evidence of a deteriorating labor market.

Over the medium-term, we see potential benefits in building resiliency in our positioning through higher-quality equities and additional diversification, such as gold.