Trump's "Ultimatum" Has 24 Hours Left, Global Stock Markets and Oil Prices "Conflicted" at Monday's Opening

Middle East geopolitical tensions suddenly escalated over the weekend, causing brief volatility in global risk assets and commodities markets at Monday’s open, followed by a period of indecision.

Due to intense exchanges between conflicting parties over the weekend and the imminent expiration of President Trump’s 48-hour ultimatum on Monday evening Eastern Time, crude oil prices initially surged, and US stock futures declined sharply.

However, after the initial shock, both oil prices and stock index futures recovered some of their volatility, currently hovering around flat, highlighting the market’s deep hesitation and uncertainty as it assesses the duration of the conflict and potential economic impacts.

Following the decline in US stocks on Friday, Asian markets plunged on Monday. The Nikkei 225 index fell by up to 4% intraday, and the KOSPI 200 futures dropped 5%, triggering a 5-minute circuit breaker on the KOSPI index due to program trading halts.

Goldman Sachs trader Shreeti Kapa stated that the market has begun to price in the inflation risks from this short-term energy shock but has not yet fully priced in the growth slowdown risks from a longer-term impact. This contrasts sharply with the 2022 energy shock, when real yields surged significantly from negative levels, causing a larger rate-negative shock.

Currently, the market’s implicit assumption is that the war and resulting energy supply disruptions will be relatively short-lived. If this assumption proves false and energy prices continue to rise beyond expectations, markets will need to reprice for larger downward revisions to global growth and corporate earnings, leading to more pronounced declines in global equities.

According to Bloomberg macro strategist Michael Ball, rising energy costs have inflationary effects, effectively taxing consumers, corporate profit margins, and market confidence simultaneously. This explains why major central banks this week have issued more hawkish signals—markets quickly priced in tightening expectations for the European Central Bank and Bank of England, and wiped out all expectations of Fed rate cuts this year, even betting on rate hikes.

Central banks aim to avoid repeating the mistakes of 2021 and 2022, when slow responses and misjudging inflation’s persistence led to rate hikes. But as economic growth slows and labor markets soften, the difficulty of raising rates increases—especially since financial conditions often tighten before the first rate hike is actually implemented.

Kapa notes that the current interest rate market is already showing this tension: the narrative of front-end re-pricing has overshadowed the sell-off of longer maturities, and concerns about policy missteps are emerging. Hawkish statements can quickly push up two-year yields, but convincing the long end that the economy can withstand another full tightening cycle amid ongoing energy shocks is much more difficult.

The Strait of Hormuz: The Only Variable in Market Pricing

The core question now is: how long will the Strait of Hormuz remain closed?

The answer to this determines whether oil tankers can pass safely, whether oil flows can return to pre-conflict levels, and the credibility and duration of any ceasefire agreement. Kapa points out that the core challenge of binary risk is that traditional diversification cannot hedge against it—an exogenous event can reprice all assets simultaneously, and diversification offers little protection.

In this context, Kapa recommends shifting portfolio management focus from optimization to structural positioning around outcome trees: overweight energy, defense, and high-quality assets in a “prolonged conflict” scenario; overweight high-beta, cyclical, and rate-sensitive assets in a “quick resolution” scenario; and reduce overall exposure rather than just net exposure, because in a binary risk environment, correct directional bets are less important than position management.

Kapa concludes that binary risk environments reward liquidity and flexibility, not directional accuracy. The best performers are often not those who correctly call the bottom but those who hold cash and can act quickly once uncertainty dissipates. Given that global equity risk premiums are near zero and valuations across regions and sectors are at historic highs, holding cash is a reasonable asymmetric position—offering little sacrifice in expected return but significant flexibility.

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