The conflict in Israel and Palestine is still ongoing, but the market has already moved on.

Author: Zhang Yaqi

Abstract

As the conflict in the Middle East escalates, market risk sentiment is recovering: gold is falling, U.S. Treasury yields are rising, and stock market volatility has plummeted, with stocks outperforming long-term bonds at the strongest level since Trump's inauguration. Analysts believe this is mainly due to ample oil inventories, and historical data shows that oil prices would need to double to potentially trigger a recession in the Western economy.

The trading data from this past Monday tells a shocking story. Just as Israel and Iran continue to attack each other, gold prices are falling, U.S. bond yields are rising, and stock market volatility has plummeted. The performance of stocks relative to long-term bonds has reached its strongest level since Trump's inauguration.

These are typical "risk-on" environmental signals. Israel's attack on Iranian nuclear facilities has long been viewed as the "ultimate event" that could severely deteriorate the global risk environment; however, oil prices not only fell on Monday but were also far below the peak in January.

The market's calmness may have its reasons. Harry Colvin from Longview Economics in London pointed out that the Middle East conflict affects markets and the global economy mainly through oil prices, while Israel has chosen a "good" time to act. Oil inventories are rising, OPEC+ countries have been trying to limit supply, and many countries are eager to find excuses not to enforce production cuts.

Although history shows that stock markets can recover quickly after geopolitical shocks, experts warn that complacency in the market is dangerous, with tail risks such as a nuclear breakthrough in Iran. Notably, Bitcoin has demonstrated characteristics of a safe-haven asset during this crisis, performing better than gold amid turmoil.

Calm Reasons: Oil Inventory and Historical Experience

Historical data shows that the oil market often anticipates the Israel-Iran conflict and prices in advance. Crude oil reaches a peak when news breaks, then falls back. This was the case during the missile exchanges last April, and a similar scenario may play out again.

More importantly, history shows that oil prices need to double to trigger a recession in the West. Nicholas Colas of DataTrek International pointed out through data from the St. Louis Fed that all recessions from 1987 to the pandemic period followed a doubling of oil prices.

Given that the recent low was $57.50, West Texas Intermediate needs to reach $115 to potentially trigger a recession - and is currently only $70.

Jim Reid from Deutsche Bank provided a reassuring statistic: historically, the S&P 500 index typically drops about 6% in the three weeks following geopolitical shocks, but fully recovers in the subsequent three weeks. The researchers at the bank listed 32 political events since 1939, showing that the median time to bottom out is 16 trading days, after which it fully recovers in 17 days.

The Dangers of Complacency: Tail Risks Still Exist

However, Tina Fordham of Fordham Global Foresight warned:

"The market seems to believe that the risks have been completely eliminated, which is a mistake."

Matt Gertken of BCA Research believes that Israel's attacks "will continue until Iran is forced to strike regional oil supplies to compel the U.S. to restrain Israel."

Andrew Bishop of Signum Global Advisors provided a probabilistic analysis: Iran has a 20% chance of preemptive surrender, a 45% chance of surrender after Israel achieves its objectives, a 25% chance of U.S. intervention, and a 10% chance of a nuclear breakout by Iran. Although there is a two-thirds chance of market-neutral outcomes, the 10% chance of a nuclear-armed Iran, especially in the context of an imminent regime change risk, is still enough to warrant at least some reduction in positions.

The Hedging Transformation of Bitcoin

In this crisis, Bitcoin has once again performed excellently. The sell-off that occurred last Thursday due to the escalation of hostile actions against Israel was brief, and then on this Monday, it surged by 4.9%, outperforming gold, which fell nearly 1%. As of the time of writing, Bitcoin has risen to $106,987 per coin.

This is in stark contrast to the approximately 13% drop in Bitcoin during the conflict with Iran last April. Analysts at Frnt Financial have pointed out that Bitcoin's safe-haven characteristics for 2025 are being communicated to the audience through factors such as U.S. Vice President JD Vance declaring that "Bitcoin is becoming a strategic asset for the United States."

In the new regulatory environment, companies such as Fidelity Digital Assets, Franklin Templeton, and BlackRock have begun to integrate these principles into their cryptocurrency strategies. This has made Bitcoin a more traditional and institutionalized asset than its founders envisioned — but it has indeed performed better in times of crisis.

The market may ultimately prove its calmness to be correct, but the risks that current investors are taking are still too high relative to the probabilities of adverse outcomes. On the geopolitical gambling table, even low-probability catastrophic events deserve more respect.