The Weekender : Risk Rattles as Middle East Boils – Oil Roars, Stocks Reel, and FX Traders Flinch
Just as traders were starting to price in a thaw on the trade front—cue the soft smiles out of D.C. and Beijing—geopolitical risk has kicked the door back open, boots and all. “Trade policy uncertainty” has plunged, sure, but that’s yesterday’s ghost. Now it’s war-risk premia doing the heavy lifting, as missile maps and oil tankers take over from tariffs and export controls.
The market has pivoted from spreadsheets to satellite images. The algos that once parsed every word of tariff negotiations are now scanning for heat signatures over Hormuz. Dollar correlations are shifting, gold’s bid is sticky, and oil isn’t trading on supply-demand anymore—it’s trading on escalation potential.
This is no longer about semiconductors and solar panels. It's about cruise missiles, choke points, and the risk that a black swan might just show up in a desert sky. Welcome back to the oldest volatility engine in the book: geopolitical roulette.
Wall Street just caught a geopolitical gut punch. Equities buckled and oil lit up like a Roman candle as markets digested reports that Iran has begun retaliatory strikes in response to Israel’s attack on its nuclear and missile infrastructure. What started as a war of shadows has now spilled into something far more combustible, and traders are suddenly realizing that this time, it might not be just another headline to fade.
The S&P 500 took a nosedive, shedding over 1% as risk assets recoiled from the growing scent of oil smoke in the Strait of Hormuz. Travel and leisure names were stuffed back into the overhead bin. At the same time, defence contractors and energy majors marched higher, riding shotgun on a flight-to-safety rotation that’s more war-torn adrenaline than fundamentals.
Brent crude went full rocket ship, ripping nearly 14% higher at one point before giving back half that gain—still a bruising move for a market that’s been sleepwalking through supply and demand headlines. Gold hovered like a sniper near record highs, while bond yields ticked up on the back of renewed inflation angst. The dollar found some footing, but it was more of a nervous shuffle than the strut you’d expect in a proper flight-to-quality moment.
But here’s the thing: the street is still treating this like a fireworks show, not a refinery fire. The shape of the oil curve says it all—prompt barrels are on fire, but the back end remains skeptical. This isn't yet a structural re-pricing of energy risk—it’s a front-loaded volatility premium in drag. As always, traders are watching for one thing: real disruption. If Iran’s oil facilities take a hit or if the Strait of Hormuz—a chokepoint through which a fifth of global oil flows—gets clogged with gunboats and drones, then we’re into true supply shock territory. Until then, the market’s just shadowboxing with oil risk premia.
Iran, for now, seems to be toeing the retaliatory line—just enough fire to save face at home, but not enough to drag in a U.S. military offensive response. Israel, notably, has kept its punches away from Iran’s oil infrastructure, suggesting the IDF is dancing close to the oil flame but not yet ready to light the fuse.
Still, traders know the drill. Middle East risk usually flares bright and fades fast—until the day it doesn’t. And that’s the wildcard: is this the usual geopolitical flare and fade, or the opening scene of something far more systemic?
The answer, as always, lies in the flow. Watch the tankers. Watch the spreads. And keep your hand near the ripcord—because if oil logistics start getting tangled in missile maps, this market isn’t remotely priced for the real thing.
Despite all the headlines, equities barely flinched this week, shrugging off a flurry of geopolitical chaos and a double-digit intraday spike in oil as if it were just another Friday. The S&P 500 slipped a modest 0.4% week over week, buoyed by a 5% surge in energy stocks, while financials lagged behind like dead weight. If you're wondering whether the market cares about the smell of war in the air, it seems only if it disrupts earnings or hampers liquidity.
Judging by the price action, some investors seem almost eager for World War 3—as long as it means a bigger bid for oil, more defence spending and faster AI adoption. In today’s upside-down risk regime, conflict is just another rotation trade.
On the trade war front, let’s not forget—it’s all about expectations. The worst-case tariff scenario was arguably priced in back in early April, when markets stared down the barrel of a full-blown decoupling. But since then, we’ve seen carve-outs, selective exemptions, and just enough diplomatic noise to suggest a face-saving deal is being choreographed—conveniently ahead of the G7 photo ops.
Equity markets don’t trade on today—they price in tomorrow’s headlines. And right now, they’re looking three to six months downfield, betting that cooler heads—or at least market-savvy spin doctors—will prevail. What felt like a policy cliff is slowly morphing into a managed descent, for now.
So, why does the market always defer to the “flare's bright and fades fast” narrative when it comes to Middle East tension?
In a world teetering between economic collapse and paralysis, only a few power centers still move with intent. The U.S.–Israel axis remains the most assertive and unpredictable force on the global chessboard—equal parts high-frequency interventionist and unapologetically self-interested. Washington’s arsenal isn’t just military—it’s legal, financial, and digital. Tel Aviv, for its part, doesn’t blink before acting, whether it’s on kinetic defense or forward deterrence. Say what you will—they move.
Russia, once stuck in diplomatic purgatory, has flipped the switch. It’s no longer playing by the post-Cold War rulebook. It’s playing for existential stakes, and increasingly acts like it has nothing to lose—a dangerous but clarifying stance in a world of hedged bets.
China, in contrast, has adopted a policy of strategic inertia. It prefers the long game, leaning into quiet economic levers rather than direct confrontation. But this passivity—whether deliberate or born from internal fragilities—is being tested in a world where soft power may no longer be enough.
The Islamic world remains fragmented. Beyond the asymmetric tenacity of non-state actors like the Houthis, most regimes operate under constrained sovereignty, boxed in by dependency, internal repression, or regional rivalries. Resistance is rare. Symbolism often replaces strategy.
As for Europe—it's a cautionary tale. Grand in ideals, hollow in capability. Brussels has weaponized bureaucracy, not deterrence. Its energy, economic, and demographic crises are self-inflicted, and its foreign policy backbone is missing in action. It’s a bloc with slogans, not solutions.
The world is dividing—not into East and West, but into movers and passengers. And the market is watching closely. When real power is exercised, capital follows—or flees.
Inflation Looked Benign in May—But the Real Signal Was in the Labour Market
May’s CPI came in cooler than expected, but beneath the headline calm, the macro picture is starting to sweat. Inflation didn’t slow because the system is healing—it slowed because demand is cracking. The real story wasn’t in prices, it was in people. Initial and continuing jobless claims are quietly surging, and if you're watching the tape like a hawk, it’s clear: something's breaking under the surface.
Initial claims just hit their highest level since October 2024, and the four-week moving average hasn’t been this frothy since August—right before the Fed dropped that surprise 50bps cut. Continuing claims are clocking levels we haven’t seen since the post-COVID comedown in late 2021. That’s not just noise; it’s the kind of labor deterioration that usually triggers alarms at Constitution Ave.
Yet markets barely blinked. Equities held steady even as Israel-Iran tensions turned kinetic and oil popped. Why? Because CPI didn’t flash red. Instead, it printed benign. But here’s the rub—underlying it was consumer fatigue. Demand fell off a cliff in key categories: auto sales tanked 9.4%, new and used car prices slid, and energy prices dropped. Even apparel, that last bastion of post-COVID indulgence, pulled back. Businesses, unsure how sticky tariffs will be, are eating margin instead of passing costs along—for now.
Services inflation is where the real curveball landed. It slowed sharply, driven by plunging airfares and softening housing costs. Supercore inflation—core services ex-housing—has collapsed from a 9.5% annualized pace in January to essentially flat over the past three months. That’s not disinflation—that’s demand destruction.
Taking a cross-section of the latest quant projections, Q2 CPI looks downright tame—tracking at just 1.7% annualized, with core inflation easing to 2.2%. That’s a soft print by any stretch. But don’t let the calm fool you—this is the eye of the storm, not the end of it.
According to current quant projections, the second half of 2025 remains primed for a tariff-driven inflation rebound. Businesses that have been quietly absorbing rising input costs won’t continue to swallow margins indefinitely. Sooner or later, the dam breaks—and the pass-through begins.
The base case sees Q4 CPI pushing up to 3.4%, with core inflation landing around 3.5%. That’s elevated, but far from the runaway scenario markets once feared. In other words, it’s a hit—but not a haymaker.
The bigger question now: is this anticipated re-acceleration a one-off tariff shock or the start of a new price regime? If it’s just a VAT-style bump and inflation then normalizes, the Fed can look through it.
In short, Q2 softness may be the setup, not the payoff.
Will the dollar doom-peddling continue? Yes, but more selectively.
I’m not out here trying to talk anyone into a reversion trade—but when it comes to FX risk, or any macro risk really, I default to one thing: skew. And right now, the short dollar trade is looking awfully one-sided.
This isn’t about calling the bottom or pretending fundamentals suddenly matter again. It’s about positioning risk being stretched to the point where even a modest catalyst—like central bank hesitation, or a soft landing on tariffs—could spark a rethink. When everyone’s already leaning the same way, it doesn’t take much to tip the balance.
While financial headlines continue to chase doom-peddling dollar bears or churn out noise masquerading as narrative, there are signs that the anti-dollar fever may be breaking—at least for now. Yes, the dollar’s taken hits from every angle this year: the tariff scare, the "Sell America" rotation, creeping doubts over Fed autonomy, and a fiscal deficit that’s ballooning into a sovereign risk talking point. That’s quite the laundry list, and frankly, it's no surprise the greenback’s slipped. But not all erosion is terminal.
Options traders—still leaning bearish—have dialed back their conviction. Skew and vol pricing suggest that the worst-case collapse thesis is on pause. Rate differentials, long ignored in this narrative, are now flashing a different message. On a pure rate spread model, the dollar looks 3–4% undervalued. Eventually, FX markets will come home to fundamentals, and that means focusing on who cuts next—or who dares not to.
And that’s where the BoE and BoJ enter the frame.
The Bank of England managed to cut rates in May while still keeping markets on their toes. A 25 bp cut wasn’t the story—it was the split vote (5-2-2) and the hawkish tone from the majority of those who supported the move. Governor Bailey is now walking a tighter line, emphasizing that the pace of cuts must be “gradual and careful” given foggy CPI data and muddled labor prints. Still, the economy’s stalling—April GDP posted the worst monthly drop since late 2023—so markets are eyeing August for the next move.
Meanwhile, the Bank of Japan remains in policy purgatory. After tentatively starting the year with a tightening bias, the tide has turned. Inflation is still above target, but falling real incomes and trade-war-induced uncertainty have left the BoJ paralyzed. Governor Ueda has said all the right things—promising hikes if underlying inflation proves sticky—but with the JGB market wobbling and consumer sentiment fading, rate hikes this year look like a stretch. Watch the bond purchase plans—that’s where the real signal lies.
Bottom line: The dollar bear story has been crowded and headline-driven, not rate-driven. As central banks globally wobble and recalibrate, the greenback might not need to do much to regain altitude against some pairs—just let others blink first.
Chart of the Week
After decades of treading water, nuclear energy is finally gearing up for a second act. According to Goldman Sachs Research, global nuclear capacity is expected to surge from 378 GW to 575 GW by 2040—a 50% jump that would lift nuclear’s share of the global power mix from 9% to 12%.
This isn’t just policy noise—it’s turning into a capital flow story. Nuclear is no longer the taboo trade; it's fast becoming the clean-energy wildcard that governments are finally willing to bet on. In May, President Trump signed a stack of executive orders designed to fast-track domestic adoption, aiming to quadruple U.S. capacity from 100 GW today to 400 GW by 2050. That’s not incremental—that’s moonshot territory.
China, as always, is scaling at speed. With plans to build 150 reactors in the next 15 years, it’s targeting 200 GW of nuclear generation by 2035. And it’s not alone—at COP29 last November, 31 countries signed on to the goal of tripling global nuclear capacity by mid-century.
The nuclear pivot isn’t just about energy security—it’s a macro shift with long legs. If these targets hold, the uranium trade, SMR tech plays, and grid infrastructure names are all set to benefit from what could be the most politically bipartisan energy bet of the next two decades.
Global investment in nuclear power is finally catching a bid. After five years of flatlining, capital flows into nuclear generation have accelerated, growing at a 14% CAGR from 2020 to 2024. It’s a structural breakout fueled by shifting policy winds, rising electricity demand, and a global sprint to decarbonize—where coal is being retired far faster than it’s being replaced.
As policy tailwinds turn into hard capital, the nuclear fuel story is coming into focus. Uranium—the lifeblood of fission—is about to enter its own bull cycle. With new reactors coming online and the lifespan of legacy assets being extended, demand for yellowcake is expected to surge.
Goldman’s team sees a uranium supply deficit of 17,500 tons by 2030—but that shortfall balloons to 100,000 tons by 2045. That’s not a pinch—that’s a squeeze. And as the gap widens, uranium pricing looks poised to shift from sleepy to strategic. For traders, it’s shaping up as a textbook case of slow-moving policy morphing into a fast-moving commodity trade.
Running Update
This was my first unforced week off in over a year, and I’m still not sure if I feel guilty or just relieved. It was a travel week—nothing major, just local ports of call—but the rainy season made things trickier. Heavy downpours most mornings shut down any hopes of going for a trail run.
But the sun’s back out—literally and figuratively. I’m back in Bangkok now, on familiar ground, and the rain patterns here tend to be more predictable. Less risk of getting caught in a mid-run thunderstorm. So it’s time to lace up again tomorrow and get back into the zone 2 rhythm.
Great stuff. The one thing I would say about the nuclear reactor story and the potential for a trade there is the fact there are many start ups rekindling Thorium as nuclear fuel, and therefore Uranium as the starting point for energy consumption in the long run will be decommissioned.