The Iran conflict triggered a major portfolio reshuffle where investors sold their biggest winners, such as gold and emerging market assets, to raise cash. This was driven first by technical needs to cover losses, then by fundamental decisions to build defensive positions.
The recent surge in bond yields is not solely due to "warflation." Data from before the conflict showed inflation was already reaccelerating, shattering market hopes for imminent rate cuts. The war acted as an accelerant on this pre-existing and more fundamental inflationary trend.
A dangerous disconnect exists between oil futures prices, which seem muted, and the physical market. Experts warn of a catastrophic global supply shortage if the Strait of Hormuz remains closed, highlighting a significant tail risk that financial markets are currently underpricing.
While markets focus on geopolitics, private credit funds are gating withdrawals, signaling significant stress. The repeated insistence from insiders that the issue is "not systemic" is itself a warning sign of a hidden risk that could spill over into public markets as investors sell liquid assets.
Extreme, headline-driven market swings are considered "bad volatility" because they defy fundamental analysis. This environment fosters mass liquidations, pod shop closures, and risk aversion, leading many institutional traders to conclude the safest position is a "blank piece of paper" (cash).
Contrary to expectations of a war-induced sell-off, the most painful trade for crowded positions is a continued equity rally and falling oil prices. Many investors are already "wounded" from wrong-footed bets, making them hesitant to re-engage, which could fuel a squeeze higher.
Regardless of the Iran war's duration, the conflict ensures Europe will face structurally higher energy costs, damaging its industrial competitiveness. This is causing macro investors to sour on European equities and credit, even if the foreign exchange market has not yet fully reflected this risk.