Volatility is the name of the game

Yesterday was an unusual session. Asian and European markets were hammered by the escalation in the Middle East, which sent oil and gas prices sharply higher. US crude jumped more than 10% at the open, while European gas futures were up as much as 50% at one point after Qatar shut down a gas production facility following an Iranian drone attack. TTF futures eventually closed nearly 40% higher.

Defense and energy stocks were the biggest winners in Europe, while banks, travel and luxury names tanked. Overall, the Stoxx 600 retreated 1.62% from its all-time high, as European sovereign bonds rebounded. The benchmark 10-year yield rose 8bp.

Sovereign yields around the world jumped as well, including the US 10-year yield — which might normally have attracted safe-haven flows. But not this time. Investors trimmed dovish expectations on fears that rising energy prices will quickly feed into inflation in the US and globally, preventing central banks that were moving toward rate cuts this year (like the Federal Reserve (Fed)) from easing — and potentially forcing others to reconsider tightening if inflation resurges.

So far, the market reaction was logical. The energy-dependent DAX was the biggest loser among major European indices, while part of the FTSE 100’s losses were offset by strong gains in energy and defense stocks.

What was unusual was the US reaction. Headlines worsened throughout the day. Beyond Qatar, Saudi Aramco halted operations at the country’s largest oil refinery after a drone strike in the area. Iranian officials said they were not ready to negotiate and would fight. President Trump said the war could last weeks, not days, and that the US would send troops if necessary — doing “whatever it takes” to achieve its objectives.

Yet oil prices retreated from their early peaks, and as oil pulled back, US equities advanced. The S&P500 and Nasdaq 100 both closed the session with modest gains. As such, US stocks outperformed their peers despite the prospect of a prolonged conflict, fading Fed cut expectations and rising yields. The retracement in oil prices appeared sufficient to reassure investors that buying the dip was justified.

That optimism is fading in Asia this morning. Oil prices are rebounding, with US crude back above $73pb after falling toward $70pb yesterday. US natural gas is trending higher, and US 10-year Treasuries remain under pressure, alongside sovereign bonds from Australia to Japan. Futures are back in negative territory. We are still left scratching our heads seeing how resilient the US session proved:

• On the stock side, Palantir jumped nearly 6% given its military exposure, while Nvidia gained 3% after announcing investments in data-center optics makers Lumentum and Coherent to secure high-speed connectivity critical for scaling AI infrastructure. However, the risk that Middle Eastern clients — facing disruptions to oil facilities and trade — could see revenues fall and delay AI investment plans, including purchases of Nvidia chips, received little attention. It remains to be seen whether that risk will be priced in with a lag.
• On the macro front, US dollar appreciation also plays against Big Tech earnings prospects. Yet Roundhill’s Magnificent 7 ETF rebounded sharply from below its 200-DMA to close 0.42% higher. Software stocks gained as well. US markets traded as if largely unconcerned by the geopolitical escalation.

That said, sustained tensions are likely to weigh on US sentiment, as well. A durable rise in energy prices would eventually hurt corporate margins and consumer demand — including in the US.

Big Tech remains exposed to a potential shift in sentiment from AI euphoria to concerns over heavy capital spending increasingly financed by debt – with or without the rise in energy prices. The rise in energy prices would only amplify the size of a future pullback.

So what’s next? An analyst at Goldman Sachs argued that “the only way up from here is down,” suggesting a correction before further gains. I also believe the recent pullback in US indices has not been sufficient to reflect the shifting risk profile facing Big Tech (as they move toward debt issuance to finance additional capex).

In FX, a prolonged war could further strengthen the US dollar, while gold’s muted reaction suggests that investors are reluctant to move capital after an impressive price rally.

Interestingly, Bitcoin gained yesterday. It traded sideways over the weekend and rebounded more than 4.5% despite questionable risk appetite. Rising energy prices and higher yields would typically weigh on cryptocurrencies, yet some flows appeared to treat Bitcoin as a geopolitical hedge. I remain skeptical about its ability to protect against geopolitical shocks, particularly if Middle East tensions ultimately reinforce regional ties with the US, including Saudi Arabia – a scenario that would only strengthen the dollar’s global status.

In conclusion, geopolitical risks are rising – not easing. Volatility is increasing alongside trade and geopolitical uncertainty, and the risk of renewed inflation could tighten global financial conditions. The US session’s resilience is absent this morning — even Korea’s Kospi is down around 6.5%.

It is never wise to sell in panic, but given limited visibility, the current selloff does not yet look compelling enough to buy the dip.