Trump has taken action! How will crude oil, gold, and US stocks be affected?

The geopolitical tensions in the Middle East are redefining the global market landscape. For the first time since 1979, the direct military confrontation between Israel and Iran has placed investors in unprecedented uncertainty. According to CCTV News, the U.S. military's direct strike on Iranian nuclear facilities on Saturday marks a significant escalation in the conflict. This has forced market participants to reassess the risk exposure of various assets.

The crude oil market is beginning to weigh the worst-case scenarios. Analysts at Oxford Economics have modeled that in the most severe case, global oil prices could surge to around $130 per barrel, pushing the U.S. inflation rate close to 6% by the end of this year, which would "completely undermine any possibility of a rate cut in the U.S. this year."

U.S. stocks may face short-term pressure, but history shows that they will rebound afterward, while the dollar faces a complex dual impact. Regarding gold, Deutsche Bank points out that preparations should be made for gold to rebuild its risk premium in the coming weeks, as the rapid decline of the current geopolitical risk premium for gold may be a false signal.

Crude Oil Market Experiences Wild Fluctuations as Traders Quickly Exit Positions

The crude oil market has become the asset class most directly affected by the current Middle East conflict. WTI crude oil futures prices have risen about 10% over the past week, while Brent crude oil futures have increased 18% since June 10, reaching a nearly five-month high of $79.04 last Thursday.

The crude oil market is struggling to respond to Trump's next moves in the Iran-Israel conflict, as every statement from the U.S. President seems capable of triggering a surge or plunge in oil prices.

Currently, traders are exiting crude oil futures positions at the fastest recorded pace—this indicates the pressure that higher volatility is placing on derivative books and suggests that future trends are difficult to predict. Data shows that since the close on June 12 (the eve of the Israeli attack), the number of futures contracts held by major exchanges has plummeted by 367 million barrels, a decrease of about 7%.

Traders and brokers indicate that the increased market volatility over the past week has made pricing trades more challenging. Ryan Fitzmaurice, senior commodity strategist at Marex Group Plc, stated: "Traders and analysts should view the current oil price volatility in the context of speculative de-risking. Looking ahead, market volatility and open interest will be key areas to watch."

The options market has also seen extreme fluctuations, with traders paying hefty premiums to hedge against the risk of further price surges. Since the conflict began, the trading volume of call options has reached record highs.

Transportation costs have also risen sharply, with crude oil shipping fees from the Middle East to China increasing by nearly 90% since the Israeli attacks began. The earnings of vessels transporting fuels such as gasoline and aviation fuel have also surged, along with a significant rise in insurance premiums.

The market is currently closely monitoring the security situation in the Strait of Hormuz, through which about one-fifth of global oil production and consumption flows. Nearly 1,000 ships' GPS signals are being disrupted daily, leading to increasingly severe security risks. Two oil tankers collided and exploded in the region, although shipowners claim it is unrelated to the conflict, highlighting the dangers faced by vessels in this waterway. Investors are weighing various market scenarios in the worst-case situation, and the direction of energy prices will be a decisive factor

The Dollar Faces Dual Impacts

Analysis indicates that the escalation of the Middle East conflict has a complex impact on the dollar. If the U.S. directly participates in the Israel-Palestine conflict, the dollar may initially benefit from safe-haven demand.

Thierry Wizman, a global foreign exchange and interest rate strategist at Macquarie Group, stated in a report: “Traders may be more concerned about the latent deterioration of trade conditions in Europe, the UK, and Japan than the economic impact on the U.S., a major oil-producing country.”

However, in the long term, the U.S.-led "nation-building" prospects may weaken the dollar. Wizman noted: “We remember that after the 9/11 attacks and during the U.S. military presence in Afghanistan and Iraq for nearly a decade, the dollar weakened.”

U.S. Stocks Under Short-Term Pressure, May Rebound Later

The U.S. stock market's current reaction to the escalation of the Middle East conflict is relatively mild. The S&P 500 index initially fell after Israel launched attacks but has since remained stable, showing little change over the past week. However, the current direct involvement of the U.S. in the conflict may trigger market panic in the near future.

This panic may only be temporary, as historical data shows that the U.S. stock market's pullbacks during the early stages of Middle East tensions are often short-lived.

According to data from Wedbush Securities and CapIQ Pro, historical experience shows that during significant moments of escalating tensions in the Middle East, including the 2003 invasion of Iraq and the 2019 attack on Saudi oil facilities, the stock market initially performed poorly but then rebounded. On average, the S&P 500 index fell 0.3% within three weeks of the conflict's onset but rose an average of 2.3% two months after the outbreak of conflict.

However, if the attacks lead to disruptions in Iranian oil supply, “that’s when the market will really sit up and pay attention,” said Art Hogan, Chief Market Strategist at B Riley Wealth. Citigroup analysts pointed out: “Geopolitical tensions have largely been ignored by the stock market, but they are being factored into oil pricing. For us, the key for the stock market will come from energy commodity pricing.”

The "Indifference" of Gold May Be an Illusion

An earlier article from Wall Street Insight mentioned that in Deutsche Bank's latest research report, the rapid decline of the geopolitical risk premium in gold since last week appears unusual compared to its historical reactions to similar geopolitical events.

As the Israel-Palestine conflict continues to escalate, spot gold has consistently declined this week, closing below $3,370, with a cumulative drop of over 1.8%, marking its first decline in three weeks. Just the week before the conflict erupted, spot gold surged significantly, peaking near $3,450.

However, Deutsche Bank stated that historical data shows that the event risk premium for gold often peaks in the 8th to 20th trading days after a crisis occurs, with an average increase of 5.5% (spot price) and 6.3% (model residual).

The bank believes that, considering the severity of the Israel-Hamas conflict and the actual actions of the U.S. military, preparations should be made for gold to rebuild its risk premium in the coming weeks. The rapid decline of the geopolitical risk premium for gold may be a false signal.