An Inescapable Liquidation is Unfolding! Soaring Oil Prices Shatter Rate Cut Fantasies as Cross-Asset Selloff Sweeps Global Markets

Since the U.S. and Israel launched a large-scale preemptive military operation against Iran—known as “Epic Fury”—nearly three weeks ago on February 28, financial markets have mostly held onto optimistic bets: that the disruption of Middle Eastern oil supplies would be very short-lived, the Strait of Hormuz would reopen soon, international oil prices would quickly decline, boosting economic growth expectations, and the Federal Reserve’s easing cycle would resume swiftly. However, on Friday, these optimistic bets appeared to be shattered.

On Friday, global stock and bond markets declined simultaneously, with the three major U.S. benchmarks suffering heavy losses. The classic safe-haven asset—gold—was heading toward its worst week since 1983. Bond traders on Friday even priced in a 50/50 chance that the Fed’s next move in the second half of the year would be a rate hike rather than a cut. The S&P 500 extended its longest weekly losing streak in a year. In contrast, last month, bond markets had priced in the possibility of 2-3 rate cuts by the Fed, even considering a potential restart of easing as early as June.

Since the outbreak of this new round of geopolitical conflict, markets have been under stress testing. But with Israel bombing gas fields critical to Iran’s economy and Qatar’s natural gas capacity being sharply reduced under the Iran war’s spillover, this week marked an escalation in geopolitical tensions. Although Trump indicated on social media that he was considering gradually “de-escalating” military actions against Iran, some senior U.S. officials stated that the White House is dispatching hundreds of Marines to the Middle East and weighing a plan to send ground troops to seize Iran’s Halq Island oil export hub. Brent crude oil hovers around $110 per barrel, no longer just a short-term wild spike—implying that high oil prices could be a persistent major threat, forcing investors, central bank policymakers, and business leaders to face this reality.

The Fed held its benchmark interest rate steady on Wednesday as expected, but Chair Jerome Powell’s press conference conveyed a hawkish stance, emphasizing that oil price shocks make the inflation outlook too uncertain to provide a clear easing timetable. Powell repeatedly stressed that the Fed may not resume rate cuts until inflation shows signs of cooling again—and this is even before considering the inflationary impact of the Middle East war, emphasizing that it’s too early to judge the war’s effects.

“We really want to see, and it’s very important, that inflation makes progress this year,” Powell said. “If we don’t see that progress, you won’t see rate cuts.”

This statement came after two consecutive meetings where the Fed kept rates unchanged. It reinforces the view that: due to persistent consumer price data that remains uncooperative, the Fed’s path to resuming a series of rate cuts by the end of 2025 remains quite distant. This sticky inflation trend also raises the possibility that the Fed’s next move could ultimately be a rate hike.

Compared to the U.S., which is rich in oil and gas resources, Europe—highly dependent on energy imports—appears to face more significant energy-driven inflation pressures. The European Central Bank and the Bank of England are both confronting similar tough issues—namely, that severe energy-driven inflation is hampering rate cuts. Despite worsening economic growth prospects, they are forced to hold steady or even shift toward rate hikes starting from April. The futures market prices a 75% chance of the ECB raising rates for the first time in April, with nearly three hikes of 25 basis points each fully priced in for this year.

The Iran war increasingly looks like it could turn into a “long-term stalemate.”

Iranian forces have effectively “semi-blocked” the Strait of Hormuz, meaning about 20% of global energy flows are fully obstructed, with attacks on oil tankers and shipping disruptions. The International Energy Agency (IEA) recently reported that the military strikes by the U.S. and Israel at the end of February triggered the largest supply disruption in oil market history; meanwhile, the U.S. is considering military measures—including potential ground or semi-ground control—to reopen shipping routes and fully control the Strait of Hormuz.

But the key is that while blocking the strait is easy, maintaining control or fighting over it requires a sustained, powerful military presence. Reopening the passage is even more difficult—entailing mine clearance, escorting ships, air superiority, and port control—meaning that once the U.S., Israel, and Iran enter a “channel control game,” this Middle East conflict could shift from airstrikes and maritime blockades into a prolonged contest over strategic nodes (like Halq Island), ultimately resembling the long stalemate of the 1980s Iran-Iraq War.

Therefore, the current benchmark for global oil prices—Brent futures—has entered a “nonlinear supply-side shock zone,” where $100 oil no longer seems like an upper limit but rather a new central price level. Goldman Sachs recently published a report stating that short-term oil prices are likely to continue rising, as flow through the Strait of Hormuz remains extremely low. If the market focuses on the risk of prolonged disruptions, Brent futures could surpass the 2008 record highs. The firm believes that given recent attacks on energy infrastructure, the Iran conflict has a high probability of pushing oil prices above $100 for the long term.

Goldman’s analysis of the five largest historical supply shocks shows that, on average, production remains 42% below normal even four years later, often reflecting infrastructure damage and low investment. The firm estimates that Iran and seven other Gulf countries will produce 3.5 million and 21.8 million barrels per day respectively by 2025—accounting for about 30% of global supply. Persistent reductions would exert long-term upward pressure on prices.

Goldman’s scenario analysis indicates that whether in the short term or by 2027, oil prices are biased toward higher risks. The persistence of past large supply shocks and the potential for long-term geopolitical stalemates suggest that, under scenarios of extended disruptions and sustained large-scale supply losses, oil prices could remain above $100 per barrel for an extended period.

The “Clearing Period” in Global Financial Markets

“The past week has been a very typical clearing period, as markets worldwide finally face reality: this conflict will last longer than market optimism previously expected, and the outcome is highly unpredictable—yet it seems to be rapidly evolving into the worst-case scenario—direct attacks on all energy infrastructure in the region,” said Mark Malek, Chief Investment Officer at Siebert Financial.

As shown in the chart above, market stress levels approached those seen during the “Liberation Day” in early April 2025, when Trump launched a global trade war—risk indicators surged to their highest since April.

According to an index from Bank of America, massive cross-market pressures are accumulating at the fastest pace since last year’s tariff shocks. Stock and credit trades based on rate expectations are unwinding rapidly and in tandem, with emerging markets under continuous pressure.

These latest sell-offs highlight growing investor anxiety over the long-term escalation of the Middle East war, which was further amplified on Friday by President Donald Trump’s criticism of allies for not joining the conflict or assisting in reopening the Strait of Hormuz. Currently, the strait remains effectively under Iranian military blockade.

ETFs tracking the S&P 500, long-term U.S. Treasuries, and gold all posted their worst weekly performances since the outbreak of the war. As shown in the chart, Middle East geopolitical turmoil has already triggered intense cross-asset volatility.

With Thursday’s volatility spiking, Société Générale lowered its recommended global equity allocation by 5 percentage points and increased its commodities allocation by the same amount. BCA Research advised clients to raise cash holdings and reduce equity exposure. Goldman Sachs’ global investment research recommends adopting a defensive stance, adjusting tactical allocations to overweight cash, underweight credit, and maintaining neutral positions in other major asset classes.

“Day after day, markets are gradually pricing in longer and more widespread chain effects,” said Garrett Melson, Portfolio Strategist at Natixis Investment Managers. He recently cut his small-cap exposure and increased allocations to large-cap growth and tech stocks with strong fundamentals.

The damage from persistently high energy prices will not be immediately apparent. It often propagates through specific channels—household budgets, corporate profit margins, benchmark financial conditions, foreign exchange markets, and central bank credibility—all of which amplify the final costs far beyond what the $100+ oil price level alone suggests.

The U.S. economy is beginning to feel the severe shockwaves from rising oil prices.

FOMC-permanent voting member Christopher Waller said on Friday that he remains cautious about how high oil prices will impact inflation, even though weak employment could support rate cuts. He noted that geopolitical conflicts seem more prolonged, increasing the risk that oil prices will stay elevated longer.

“If this rate—energy shock—persists or worsens, then the pricing of expansionary growth assets may need to be adjusted downward,” said Christian Mueller-Glissmann, Head of Asset Allocation Research at Goldman Sachs Global Investment Research. “Markets have not fully priced in the economic growth risks, which partly explains why U.S. stocks have not yet experienced a major bear-market correction.”

In the U.S., consumers are already feeling the initial impacts of the Iran conflict. Gasoline prices are approaching $4 per gallon, and the Federal Reserve Bank of Atlanta estimates that about $0.80 of that increase is mainly due to the geopolitical tensions. Credit and debit card data compiled by the Fed show that gasoline spending in the week ending March 14 rose over 14% year-over-year—this extra expenditure must be squeezed out of other spending. If the shock persists, consumer confidence could face significant downside risks.

The pressure extends beyond gas stations. Companies planning investments in 2026 based on lower borrowing costs may need to reassess their future U.S. investment plans; energy-intensive industries face cost shocks—either absorbing them or passing them on to already strained consumers.

As fuel embedded in nearly all supply chains, diesel prices are rising even faster than gasoline, further risking broader damage to U.S. manufacturing and the real economy. In financial markets, this adjustment could further widen valuation and credit spreads built on overly optimistic rate cut expectations earlier in the year, leaving significant downside room. Overseas investors may face capital outflows under intense selling pressure, with domestic policies unable to fully offset the impact.

“Risk premiums should be higher—this is the largest energy supply shock in history, and almost no simple fiscal, monetary, or energy policy can effectively counter it, so recession risks should be significantly elevated,” said Priya Misra, Head of Global Asset Allocation at J.P. Morgan Asset Management. “The resilience of stocks and credit spreads is over-optimistic, driven by the long bull market and strong balance sheets that have allowed households and firms to absorb this energy shock.”