CICC: Is the Market Pricing in Iran Risk Sufficiently?

Since the outbreak of the Iran situation on February 28, the conflict has entered its fourth week, and there are no signs of easing—in fact, it continues to escalate. With the ongoing “substantive” blockade of the Strait of Hormuz, Israel’s direct strikes on Iran’s key energy facilities have intensified the impact on the global energy markets, with Brent crude prices rising above $110 per barrel and TTF natural gas prices surging 13% in a single day. The escalation and energy “crisis” have also triggered increased turbulence in financial markets, with gold plunging 15%, U.S. Treasury yields soaring to 4.4%, and volatility in U.S., A-share, and Hong Kong markets intensifying—U.S. bond volatility reaching its highest since April 2025.

Chart: Bloomberg-based rolling 7-day oil tanker passage volume through the Strait of Hormuz has remained at 1–2 ships since March 9

Source: Bloomberg, CICC Research Department

Chart: Volatility of U.S. stocks, U.S. bonds, and gold has risen again since March 17

Source: Bloomberg, CICC Research Department

As the situation develops, market expectations for the end of the conflict have shifted from an initial “quick resolution” to a “long-term standoff.” According to Polymarket betting odds, the probability of conflict ending in March has dropped from 78% on February 28 to 4% on March 20. Currently, the highest probability (44%) is that the conflict will end between April 1 and May 15. As these expectations are pushed back, trading focus is gradually shifting from short-term emotional shocks to longer-term secondary effects, such as liquidity feedback on assets and the second-order pressures of high energy costs on inflation and supply chains. This may partly explain the sudden increase in volatility in gold, U.S. bonds, U.S. stocks, and even A/H shares last week (“How does the Iran situation affect Chinese and U.S. markets?”).

Chart: Betting data shows the highest probability of conflict ending between April 1 and May 15

Source: Polymarket, CICC Research Department

Rather than futilely trying to predict how the conflict itself will evolve, we believe that analyzing the differences in market expectations embedded in various assets can more effectively help investors respond under different scenarios. Using the Fed’s rate cut expectations as a baseline and bridge, we find that different assets incorporate very different expectations regarding Iran and oil prices, which both signals risk and creates opportunities.

Currently, the market no longer expects the Fed to cut rates. Achieving this would imply expecting the conflict to persist into Q3 or Q4 with oil prices remaining above $100. Based on this baseline, we find: 1) Bond expectations are the most pessimistic, and after recent corrections, copper and gold prices have quickly moved toward tightening expectations, suggesting that unless the conflict lasts into Q3/Q4, risks are somewhat alleviated, and there may even be buying opportunities if tensions ease; 2) Conversely, equity market expectations are insufficient, as they do not fully price in a prolonged conflict into Q3/Q4 with sustained high oil prices, so if the situation worsens, there could still be downside risks. This aligns with the differing performance among assets last week. How can we assess whether expectations embedded in various assets are sufficient?

Under what conditions can the Fed not cut rates this year? If the conflict persists into Q3/Q4 and oil prices stay above $100, then the Fed is unlikely to cut rates in the short term. To offset the high base effects of inflation in late 2025, inflation would need to stay above 3.5%. We estimate that, without Iran-related disruptions, the U.S. CPI peak for the year would be around 2.8% in Q2. Given the high base last year, CPI would gradually decline after peaking in Q2, not preventing the Fed from resuming rate cuts in H2, especially after Waller takes over in June.

Chart: Without Iran-related disruptions, we expect the CPI peak for the year to be around 2.8%

Source: Haver, CICC Research Department

The $100 oil price is a “watershed” that could push inflation peaks from 2.8% to 3.5%, roughly matching the current federal funds rate (3.5–3.75%), implying the Fed will find it difficult to cut rates in the short term. After a brief spike, prices could fall back in H2, so this is more about delaying rate cuts. We estimate that every 10% increase in oil prices raises the U.S. CPI by about 0.2–0.3 percentage points. Based on CICC’s commodity team’s projection (Brent rising to $120 in Q2 and then falling back to $80–90 in Q3/Q4), we estimate that although the CPI could peak around 4.6% in Q2, high base effects and oil price declines will bring it down to 2.8–3.2%. In other words, the Fed can still cut rates in H2.

What conditions would make it impossible for the Fed to cut rates this year?** To offset the high base effects of 2025 and keep inflation above 3.5%, oil prices would need to stay above $100 throughout Q3/Q4. This aligns with CICC’s extreme scenario, where if the U.S.-Israel-Iran conflict persists until year-end, Brent could reach $150 in Q2, with the median price remaining at $100 in Q3/Q4.

Chart: If the oil price remains at $100 in H2, CPI will stay above 3.5% all year

Source: Haver, CICC Research Department

Chart: Under extreme scenarios, oil could rise to $150 in Q2, with the median at $100 in Q3/Q4

Source: Bloomberg, CICC Research Department

From this perspective, translating bond market expectations of no rate cuts this year into a judgment on the conflict implies expecting the conflict to last into Q3/Q4 with oil prices above $100, which is very pessimistic. Equity markets, however, are not as pessimistic, possibly due to differences in investor groups and profit impacts, or expectations that Trump might still compromise under midterm election pressures (“TACO”). The latest Bank of America Merrill Lynch global fund manager survey shows the average market expectation for oil at around $76 by year-end, with only 11% expecting over $90. This stark divergence signals both risks and potential opportunities.

Chart: Trump approval rate drops to 42.7%, with lowest support on inflation issues

Source: CEIC, Silver Bulletin, CICC Research Department

Chart: The weighted average of investor expectations for Brent crude at year-end is $76 per barrel

Source: BofA, CICC Research Department

How are expectations embedded in various assets? U.S. bonds, gold, and copper “do not expect rate cuts this year,” while equity markets are relatively optimistic

Using the embedded rate cut expectations as a basis, copper, gold, and U.S. bonds are the most pessimistic, with CME interest rate futures already pricing in a delay until September 2027, while equities are more optimistic. Specifically, the expected rate cut magnitude over the next year is: Fed dot plot (1 cut) > S&P 500 (0.6 cuts) > Nasdaq (0 cuts) > U.S. bonds (0.3 hikes) > gold (0.4 hikes) ≈ interest rate futures (0.4 hikes) > copper (0.5 hikes) ≈ Dow Jones (0.5 hikes).

Chart: Expected rate cuts over the next year based on current asset pricing: Fed dot plot (1 cut) > S&P 500 (0.6 cuts) > Nasdaq (0) > U.S. bonds (0.3 hikes) > gold (0.4 hikes) ≈ interest rate futures (0.4 hikes) > copper (0.5 hikes) ≈ Dow Jones (0.5 hikes)

Source: Bloomberg, Fed, CICC Research Department; as of March 20

► Copper: Already priced in slight rate hikes. Copper prices have fallen due to liquidity tightening and concerns over demand erosion from high oil prices, with LME copper down 10.6% and Comex copper down 12.4% since the Iran escalation. The copper-oil ratio has dropped from a high of 219 in early January to 103, reaching the 2010 average, indicating some demand slowdown is already priced in. The RSI (Relative Strength Index) for Comex copper has fallen to 33, near oversold levels. We estimate that the current Comex copper price (~$5.35/lb) implies a 1-year interest rate expectation of 3.74%, above the current median federal funds rate of 3.625%, implying a 12bp rate hike over the next year.

Chart: Copper-oil ratio has fallen from 219 in early January to 103, reaching the 2010 average

Source: Bloomberg, CICC Research Department

Chart: Comex copper RSI has fallen to 33, near oversold

Source: Bloomberg, CICC Research Department

► Gold: Already priced in no rate cuts this year. Since the Iran escalation, amid a strengthening dollar, weakening rate cut expectations, and even liquidity tightening, gold has plunged 15% from $5,278/oz to below $4,500/oz, with a sharp acceleration last week. The RSI has fallen from a high of 90 at the end of January to 29, entering oversold territory. The gold-oil ratio has dropped from 79 in early January to 40, close to the mean plus one standard deviation since 2010. We estimate that the current gold price (~$4,492/oz) implies a 1-year interest rate expectation of 3.72%, slightly above the median federal funds rate of 3.625%, implying a 10bp rate hike expected over the next year. If other factors remain unchanged, the rate implied by CME futures (which expect rate cuts only by September 2027) corresponds to a gold price of around $4,500/oz.

Chart: If the conflict ends in Q2, we will slightly lower the year-end target for the S&P 500 to 7,100–7,200

Source: Bloomberg, CICC Research Department

► U.S. bonds: Also priced in no rate cuts this year. Since the outbreak of the U.S.-Israel-Iran conflict on February 28, the 10-year Treasury yield has risen 44bp to 4.38%. The main drivers are: 1) Real yields dominate (31bp), with inflation expectations rising (13bp), reflecting market pricing in prolonged high oil prices and the Fed maintaining higher rates longer (“Higher for Longer”); 2) Rate expectations dominate (27bp), with the term premium roughly unchanged, indicating that volatility is mainly about re-anchoring rate paths. This aligns with the information from interest rate futures, which have priced in a 70bp increase in the expected federal funds rate over the next year since February 28, pushing the expected rate hike timing from October 2026 to September 2027. The pessimistic outlook suggests that the current 4.4% long-term yield already incorporates the most severe monetary policy path. If the conflict ends within Q2, there could be room for long bond positions.

Chart: 10-year Treasury yield expectations have risen 27bp, with the term premium roughly flat

Source: Bloomberg, CICC Research Department

Chart: Futures imply the federal funds rate will be delayed until September 2027

Source: Bloomberg, CICC Research Department

Chart: CME interest rate futures now project rate cuts only by September 2027

Source: CME, CICC Research Department

► U.S. stocks: Still some rate cut expectations priced in, but earnings expectations have not fully incorporated sustained high oil prices. Since the conflict erupted, U.S. equities have been relatively resilient compared to global markets, partly because equity markets tend to react more slowly to rate cut expectations than bonds, and partly because investors expect Trump to still reach a compromise (“TACO”). Dissecting the index performance, although valuation multiples have shrunk due to higher rates, the recovery in risk appetite has offset some of the valuation pressure, especially as earnings expectations for the S&P 500 and Nasdaq are still being revised upward, keeping declines manageable. If the conflict escalates further, U.S. stocks could face a 10% correction: valuation multiples could retrace 3–4%, and earnings could be revised downward by 6–7% to reflect high oil prices. Conversely, if the conflict ends in Q2, valuation could recover, but given the impact of high oil prices on profits in H1, we lower the year-end target for the S&P 500 from 7,600–7,800 to 7,100–7,200.

Chart: U.S. stock valuations have contracted significantly due to high rates

Source: Bloomberg, CICC Research Department

Chart: The contribution of risk appetite recovery and earnings upgrades has kept overall declines manageable

Source: FactSet, CICC Research Department

Chart: If the conflict ends in Q2, we will slightly lower the year-end target for the S&P 500 to 7,100–7,200

Source: Bloomberg, CICC Research Department

► China markets: Internal divergence, with Hong Kong and A-shares more sensitive to liquidity and growth. For China, Hong Kong stocks and certain growth sectors like the STAR 50 are more sensitive to USD and U.S. bond yields. If U.S. yields and the dollar remain high, it will likely impact liquidity and growth-oriented stocks, especially those more sensitive to overseas liquidity. Since the Iran escalation, tech-heavy indices like the STAR 50 (-11.4%), Hang Seng Tech (-5.2%), and Hang Seng Index (-5.1%) have fallen more sharply, though Hang Seng Tech was already declining before the escalation, providing some valuation support. Other major Chinese indices like the Shanghai Composite and CSI 300 have shown resilience, down 4.9% and 3.1%, respectively, with the ChiNext up 1.3%. Additionally, if oil prices stay high, corporate profits could be modestly pressured, especially in chemicals, transportation, and related sectors (“How does the Iran situation affect Chinese and U.S. markets?”).

Chart: Liquidity-sensitive Hong Kong and STAR 50 stocks have fallen more

Source: Wind, CICC Research Department; data as of March 20, 2026

Chart: Historically, Hong Kong and A-shares growth stocks are more sensitive to the dollar index, especially Hang Seng Tech and STAR 50

Source: Wind, CICC Research Department

Chart: The same applies to U.S. bond yields; Hang Seng Tech and growth stocks are more sensitive

Source: Wind, CICC Research Department

Moreover, sustained high oil prices will continue to support a strong dollar. In the short term, rapid oil price increases are driven by: 1) the U.S. shale revolution turning the U.S. into a net oil exporter, reducing negative impacts on energy prices compared to Europe and Japan; 2) rising oil prices boosting inflation expectations and dampening rate cut prospects; 3) liquidity tightening requiring cash, supporting the dollar. If oil remains above $100 long-term, risking stagflation or recession, the U.S. may be less affected than Europe and Japan, which could further support a high dollar. Looking back at 2022 after the Russia-Ukraine conflict, the global economy entered stagflation, but the U.S. was less impacted by rising energy prices than Europe and Japan, and aggressive Fed rate hikes pushed the dollar from 97 to 114.

What’s next? As long as the conflict doesn’t last into H2, consider long positions in U.S. bonds and gold; if prolonged uncertainty is feared, cash and dividend stocks may be safer options.

The expectations embedded in different assets regarding geopolitical risks shape subsequent trading strategies—both risks and opportunities. Based on the above analysis, 1) Optimistic scenario: The Iran situation will not last long; oil prices will gradually decline in Q3/Q4; Waller takes over in June, so rate cut expectations for H2 remain.** 2) Pessimistic scenario:** The Iran situation drags on, with oil prices staying high above $100 into Q3/Q4, and Waller’s appointment delayed, Powell remaining Chair, significantly reducing the likelihood of rate cuts this year. Therefore, from a trading perspective:

► If one does not expect the conflict to end until Q3/Q4, then current bond and gold expectations are overly pessimistic, offering a “long” opportunity, because unless the conflict drags into Q3/Q4, rate cuts in H2 are still possible. Copper’s outlook depends on demand recovery. Additionally, the downward pressure on equities could ease significantly.

► Conversely, if one fears the conflict will last into H2, then the underpriced assets—U.S. stocks—may face downside risks; A/H shares, especially growth stocks, could also be affected by high rates. However, Hang Seng Tech, having already fallen sharply, is undervalued, and Chinese blue chips with capital account restrictions and policy support may be more resilient.

At the industry level, if the Iran escalation persists, the market may first worry about external demand sectors (recession risk from high oil prices), then cyclicals (demand shocks), and finally tech (valuation pressures).

In this context, only USD cash (short-term bonds) and defensive sectors within China (low-volatility dividend, consumer, real estate, or undervalued stocks) can serve as effective hedges. Additionally, based on our credit cycle framework, since Q2 is expected to be the weakest phase, adjusting positions accordingly to hedge uncertainties is also a prudent approach.

Source: CICC Insights

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