JPMorgan Chase’s interpretation of the situation in the Middle East: The baseline scenario is still a “short-term conflict”, but investors require “specific conditions” to re-enter the market

# Long Yue

Source: Wallstreetcn

The conflict in the Middle East has triggered a sharp surge in natural gas and oil prices, directly breaking the crowded consensus on the 2026 "pro‑cyclical" trade and sparking a cross‑asset washout. JPMorgan points out that constrained by three pressures—**munitions, markets, and midterm elections**—the conflict will most likely be "short‑lived," yet investors must not blindly buy the dip. Capital will only return to the market when extreme valuations, de-escalation headlines, or sufficient time have been observed.

A geopolitical storm in the Middle East has ruthlessly broken Wall Street’s 2026 "pro‑cyclical" consensus. Faced with soaring energy prices and asset liquidation, JPMorgan warns that bottom‑fishing funds are still waiting for the "starting gun" from valuations, headlines, and time.

According to Zhuifeng Trading Desk, on March 6, JPMorgan released its latest *Global Market Strategy* report. Following the U.S. and Israeli strikes on Iran, geopolitics has instantly dominated global macro pricing, with markets bracing for potential inflationary and macro shocks.

## Soaring energy bursts the "pro‑cyclical" dream; markets face cross-asset washout

The market panic essentially stems from an overcrowded original script.

Entering 2026, Wall Street held an unusually unified trading consensus: long global equities, short the U.S. dollar, long gold, short crude oil, and carry trades in high‑yielding foreign exchange and rates in emerging markets—a typical pro‑cyclical portfolio.

However, reality dealt a heavy blow. Commercial traffic through the Strait of Hormuz has nearly stalled. Over the past week, natural gas prices jumped roughly 60%, and crude oil soared about 29%.

This sudden energy crisis directly triggered systematic deleveraging and a massive washout of consensus positions. Capital was forced to re‑evaluate risk exposures, and the strong rebound in the U.S. dollar reaffirmed its irreplaceable safe‑haven status during panic episodes.

## The "three Ms" shaping the conflict and the tail risk of $120 oil

Amid the crisis, JPMorgan’s base case remains that this will be only a short conflict lasting several weeks.

The logic is straightforward: constrained by ammunition stockpiles, logistical bottlenecks, and the heavy macro cost of closing the Strait of Hormuz, the conflict is unsustainable in the long run.

JPMorgan’s geopolitical analysts put it sharply:

> “At some point, resource risks will begin to outweigh increasingly marginal military gains. The conflict’s outcome will ultimately depend on the **three Ms**: Munitions, Markets, and Midterms.”

On the macro front, if Brent crude averages $80/bbl in the first half, it would represent only a moderate shock. Models show it would reduce global GDP growth by 0.6% and push CPI up by just over 1%—not enough to derail the global economic expansion.

The risk lies in physical bottlenecks. Onshore storage tanks and floating storage capacity in the Gulf are near limits. If U.S. naval escorts and transit insurance programs are delayed and shipping fails to resume, a chain reaction of forced production cuts will emerge. Once storage capacity is exhausted, crude prices face a tail risk of spiking to **$100–120/bbl**. By contrast, natural gas will have an even longer recovery cycle, as liquefaction plants take weeks to restart.

## What’s missing for bottom-fishing?

Facing a sharp correction in asset prices, when can investors re-enter? JPMorgan’s answer: wait for a "circuit breaker."

For investors to fade the washout and buy the dip, markets must meet **at least one** of three conditions:

- Extreme valuations emerge;

- Material de-escalation headlines appear;

- Sufficient time passes to form a de-escalation feedback loop.

Yet the reality is sobering. JPMorgan emphasizes:

> “So far, valuations do not look attractive enough, headlines keep us cautious, and we remain some way from a cooling feedback loop.”

## Cross-asset pricing reconfiguration: long gold, prefer Korea, underweight Europe

While waiting for the geopolitical de-escalation trigger—and amid intense recent debate over whether AI foundation models will squeeze software profits—JPMorgan lays out its reconfigured cross‑asset trading framework:

- **Commodities**: If tensions cool, going long gold is the highest-probability, most attractive re-entry trade, supported by both fundamentals and technicals.

- **Equities (prefer Korea, avoid Europe)**: Peak AI fears for stocks have passed. Capital expenditures for the "AI 30" alone will reach $750 billion by end‑2026. Structurally, it favors underowned low‑volatility assets. Within the U.S. and emerging markets, it prefers software over semiconductors. Among emerging markets, **Korea** is highly attractive due to its core position in the global AI memory chip supply chain. Conversely, Europe— a large energy importer—will see profit margins and real incomes squeezed by fossil fuel risk premiums and must be firmly avoided in the near term.

- **Rates & FX (rate cut expectations delayed)**: Inflation risks from energy have led markets to sharply push back Fed rate cut expectations. The first cut is now priced for October, with only 50 basis points of cumulative cuts by July 2027. JPMorgan therefore took profits on short 2‑year U.S. Treasury positions and shifted to **short 5‑year U.S. Treasuries**. For FX: it remains bearish the U.S. dollar medium‑term but favors the Australian dollar (AUD) and Norwegian krone (NOK), which are tied to the macro cycle, while staying cautious on the euro due to energy pressures.

The above content is from Zhuifeng Trading Desk.

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