JPMorgan analyzes Middle East situation: the baseline scenario remains a "short-term conflict," but investors need "specific conditions" to re-enter the market

A Middle East geopolitical storm ruthlessly shattered Wall Street’s 2026 “pro-cyclical” consensus. Faced with soaring energy prices and asset washouts, JPMorgan warns: bottom-fishing funds are still waiting for the “catalyst” of valuations, headlines, and timing.

According to Wind Trading Desk, on March 6, JPMorgan released its latest “Global Market Strategy” report. After the US and Israel launched strikes on Iran, geopolitical factors instantly dominated global macro pricing, and markets are on high alert for potential inflation and macro shocks.

Energy Surge Breaks the “Pro-Cyclical” Dream, Markets Face Cross-Asset Washout

Market panic is essentially due to an overcrowded script.

By 2026, Wall Street’s trading consensus was highly aligned: go long global stocks, short the dollar, go long gold, short crude oil, and engage in high-yield FX and interest rate arbitrage in emerging markets. This is a classic “pro-cyclical” portfolio.

However, reality delivered a heavy blow. Commercial traffic through the Strait of Hormuz nearly halted. Over the past week, natural gas prices surged about 60%, and crude oil prices soared approximately 29%.

This sudden energy crisis directly triggered systemic deleveraging and large-scale washouts of the above positions. Funds were forced to reassess risk exposure, and the dollar’s strong rebound reaffirmed its status as an irreplaceable safe haven during panic.

The “Three Ms” and the $120 Tail Risk That Decide the Conflict’s Course

In the face of crisis, JPMorgan’s baseline assumption remains: this will be a short-term conflict lasting only a few weeks.

The logic behind this is straightforward: limited by ammunition stockpiles, logistical bottlenecks, and the high macro costs of closing the Strait of Hormuz, the conflict is unlikely to be sustained long-term.

JPMorgan geopolitical analyst sharply pointed out:

“At some point, resource risks will begin to outweigh increasingly marginal military gains. The outcome of the conflict will ultimately depend on the three Ms: Munitions, Markets, and Midterms.”

On a macro level, if Brent crude maintains an average of $80 per barrel in the first half of the year, it would only be a mild shock. Models show it would reduce global GDP growth by 0.6%, push CPI up by over 1%, and not derail global economic expansion.

But the risk lies in physical bottlenecks. Currently, land-based oil tanks and floating storage in the Gulf are nearing capacity. If US warships’ escort and transit insurance plans are delayed, preventing resumption of operations, a chain reaction of shutdowns will emerge. Once storage capacity is exhausted, oil prices could surge to the tail risk of $100–$120 per barrel. In contrast, natural gas recovery will take longer, as restarting liquefaction plants itself requires several weeks.

What’s Still Missing for Bottom-Fishing?

When can investors re-enter after asset prices plunge? JPMorgan’s answer: wait for a “circuit breaker.”

To enable contrarian bottom-fishing (fade the wash-out), the market must meet at least one of the following three conditions:

2. Valuations fall to extreme levels;

3. Substantial news headlines indicating cooling;

4. Sufficient time has passed to create a feedback loop of cooling.

However, the current situation is harsh. JPMorgan emphasizes:

“So far, valuations still don’t look attractive enough, news headlines keep us cautious, and there’s still a long way to go before forming a feedback loop of cooling.”

Cross-Asset Repricing: Betting on Gold, Favoring Korea, Avoiding Europe

While waiting for geopolitical cooling signals, combined with recent intense debates over whether AI foundational models will squeeze software profits, JPMorgan offers a reconstructed cross-asset trading logic:

• Commodities: If the situation cools, supported by fundamentals and technicals, going long gold offers the highest win rate and attractiveness for re-entry.

• Equities (favor Korea, avoid Europe): The peak of AI-related concerns in equities has passed. By the end of 2026, “AI 30” stocks alone will see capital expenditure reach $750 billion. Structurally, favor low-volatility assets (Low Vol), and in the US and emerging markets, prefer software stocks over semiconductors. Among emerging markets, Korea is highly attractive due to its central role in the global AI storage chip supply chain. Conversely, Europe, as a major energy importer, faces risk premiums on fossil fuels that will severely compress corporate profits and erode real income, so short-term avoidance is necessary.

• Interest Rates and FX (delayed rate cuts): Inflation risks from energy have led markets to significantly delay Fed rate cut expectations. Currently, the first cut is expected in October, with only 50 basis points of cuts by July 2027. Therefore, JPMorgan closed its “short 2-year US Treasuries” position and shifted to “short 5-year Treasuries.” In FX, medium-term outlook remains bearish on the dollar, but the Australian dollar (AUD) and Norwegian krone (NOK) are favored due to macro cycles, while caution is maintained on the euro amid energy pressures.

All the above insights are from Wind Trading Desk.

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