The US-Iran conflict continues to escalate, and Wall Street has entered "risk aversion mode"!

Caixin Global, March 2 (Editor Huang Junzhi) The rapidly spreading conflict in the Middle East has heightened investor anxiety and strengthened demand for safe-haven assets such as government bonds, gold, and Swiss francs.

After a full recovery in Monday’s trading, all eyes will focus on the energy markets. During Asian morning trading, traders sought safe-haven assets, with the US dollar surging, the Swiss franc strengthening slightly against major currencies, and the Japanese yen remaining flat. The ongoing turmoil in the Middle East and the chain reaction from rising oil prices provide new reasons for fund managers to sell stocks and shift into safe assets.

According to John Briggs, head of US interest rate strategy at Natixis, France’s export bank, traders will adopt a “risk-averse first, ask questions later” approach. He said, “The attacks and Iran’s retaliation exceeded market expectations.”

Briggs noted that US Treasury prices could continue last week’s trend, when short-term yields fell to their lowest levels since 2022. Other investors are watching the energy choke points. Dave Mazza, an analyst at Roundhill Financial, said he is closely monitoring traffic in the Strait of Hormuz, which accounts for about a quarter of global seaborne oil trade.

“This is about the risk to the Strait of Hormuz, not retaliation. If shipping remains smooth, the stock market can weather the storm,” he said. “If shipping is disrupted, everything will be unpredictable.”

Ed Al-Hussainy, portfolio manager at Columbia Threadneedle Investments, said that high valuations in global equities and credit markets also make investors more prone to risk reduction. The market had previously been unsettled by changes in US tariffs, disruptive impacts of artificial intelligence, and pressures related to private credit.

“No one can say how much risk will be reduced,” he added.

Barclays strategists warned investors not to rush into stocks during a decline. Ajay Rajadhyaksha, global head of research at the bank, pointed out that investors have become accustomed to rapid de-escalation of geopolitical conflicts, but this event could last longer due to US casualties, potential attacks on Iranian leadership, and disruptions in the Strait of Hormuz.

“The risk-reward doesn’t seem attractive,” he said. “If the stock market pulls back to a certain level (for example, a drop of more than 10% in the S&P 500), there might be a buying opportunity. But now is not the time.”

Below are some Wall Street quick takes compiled by the editor:

Kevin Gordon, Chief Macro Strategist at Charles Schwab

If oil prices continue to rise, it could trigger a short-term inflation panic, impacting the stock market. But I believe investors should continue to distinguish between headline risks and actual earnings risks. If this conflict does not have substantive follow-on effects on economic growth or profits, any negative reaction in the stock market could be short-lived.

Vincent Mortier, Chief Investment Officer at Amundi

In the short term, as we wait for clearer developments, we can expect oil prices to surge (by 5% to 10%), US interest rates to decline, gold prices to rise, and stocks to dip slightly (about 1%). This also provides an excuse for some reasonable profit-taking when markets are at all-time highs.

Brendan McKenna, Emerging Markets Strategist at Wells Fargo

This is undoubtedly a heavy blow, weakening emerging markets. Iran’s response is more hostile than ever, the Strait of Hormuz is effectively closed, and the US and Israel are more hawkish toward Iran. This shock, combined with overvalued and heavily weighted positions in emerging markets, is likely to trigger a sell-off early in the conflict.

Gregory Faranello, Head of US Rates at Amerivet Securities

Military actions against Iran could last for weeks. We believe it won’t be prolonged. Over the past four years, US Treasury yields have fluctuated within a range, and if investors seek safe assets, yields still have room to fall. Ultimately, yields will be determined by the Federal Reserve and economic conditions. This military action against Iran won’t change the US’s fundamental outlook.

Frank Monkam, Cross-Asset Macro Strategist and Trader at Buffalo Bayou Commodities

Iran’s weekend attack almost perfectly triggered a sell-off in the already fragile stock market, and recent volatility is likely to persist in the short term. Nevertheless, geopolitical conflicts usually only cause temporary declines rather than sustained bear markets, so I expect that once the Middle East situation is digested, stocks will eventually stabilize.

From a broader macro perspective, the question is how oil shocks will impact the economy, which has already shown signs of mild stagflation recently. Therefore, I also expect policy volatility to come back into focus over the coming weeks and months.

Rajeev de Mello, Global Macro Portfolio Manager at Gama Asset Management SA

Long-term escalation of hostilities between the US and Iran will first transmit through the oil sector to emerging markets.

Most large emerging market economies are net oil importers, with energy still a significant part of their import bills and inflation baskets. Rising crude oil prices will widen current account deficits, squeeze real incomes, and force central banks to choose between supporting growth and containing inflation expectations. Given the recent strong performance of risk assets in emerging markets, this is especially important: positions and market sentiment have improved, leaving less room for adverse trade shocks.

Joe Gilbert, Portfolio Manager at Integrity Asset Management

Energy and metals stocks will lead gains, along with traditional defensive sectors like real estate and utilities. Defense stocks will also be in demand due to increased demand for defense products. Non-essential consumer stocks will be hit by rising oil prices, hurting airlines and retailers.

Stephan Kemper, Chief Investment Strategist at BNP Paribas Wealth Management

I expect stocks to fall sharply as this will hurt market sentiment. The main downside risk comes from oil.

If oil prices stay high, it could impact economic growth prospects and inflation data, ultimately making it harder for the Fed to cut rates. This could hinder the recent rally in cyclical stocks. But if the impact on oil prices is limited, I am more inclined to see any larger declines as a long-term buying opportunity.

Madison Faller, Global Investment Strategist at J.P. Morgan Private Bank

For investors, chain reactions could ripple through the global economy and financial system. Energy is at the core of these risks, and the Middle East is a key hub for global oil and gas transportation. Even the possibility of disruptions will quickly impact production costs, consumer prices, monetary policy expectations, market sentiment, and broader growth and inflation outlooks.

We remain optimistic about this year’s outlook, but these events also highlight the reality of an increasingly fragmented global order. Building resilient portfolios—allocating to gold and strategically important industries—is more important than ever.

Maxence Visseau, Research Director at Arkevium in Dubai

Regarding US Treasuries, I expect yields to initially fall by at least 5 to 10 basis points. But the issue is oil. If there is any disruption in the Strait of Hormuz causing oil prices to spike to $80–$90 per barrel, the long-term bond market will face a tug-of-war between safe-haven demand and inflation expectations re-pricing.

As markets begin to price in the Fed’s rate cuts falling short, breakeven inflation rates could further widen, and the yield curve may steepen sharply. The Fed has currently kept rates at 3.5%–3.75%, with inflation near 3%—energy shocks will significantly complicate their task and may force a hawkish stance.