Markets have had a clear reminder over the past few days that political unpredictability is still a powerful source of volatility.
The contrast between last year’s “Liberation Day” and today’s escalation with Iran is striking, and once again March and April are proving difficult months for President Trump.
At the same time, Democrats are making inroads from Texas to Mar a Lago: recent local elections in traditionally Republican areas of Texas have flipped to blue, and a Democratic candidate has just won in the very district that includes Mar a Lago.
For a president who openly treats the stock market as his primary scoreboard, watching his base erode on such symbolic ground is a genuine setback and increases the likelihood that he will try to put a so-called Trump put under risk assets.
On the geopolitical front, the third week of open conflict between the United States and Iran has clearly changed the scale of the shock. Key LNG facilities in the Gulf have been hit, European gas prices have almost doubled in a matter of weeks, and Brent crude is up roughly 50 percent over the month, now comfortably above 100 dollars a barrel.
This is no longer a passing headline, but a true supply shock in energy, with direct consequences for inflation and for central bank reaction functions.
Paradoxically, markets have held up better than feared because, since the war in Ukraine, investors have been forced to live with the uncomfortable reality that armed conflict is part of the new normal macro backdrop rather than an exceptional event.
Central banks have responded by shutting the door on the idea of a quick pivot. The Fed has kept rates on hold but made it clear that inflation is still too high to justify cuts any time soon, and long dated US yields have moved back towards last summer’s peaks.
As of 26 March, the damage on equities is tangible: from the end of February, the DAX is down about 12 percent, the EuroStoxx 50 and SMI around 11 percent, the S and P 500 roughly 7 percent, and MSCI Asia close to 10 percent. That pattern reflects the combination of an energy shock, higher rates, and a swift, deliberate reduction in risk exposure.
Gold has been one of the surprises of this phase. After setting record highs earlier in the year, it has given back close to 15 percent over the month, pressured by rising real yields, a firmer dollar, and the collapse of the imminent Fed pivot narrative. On top of that, technical flows have done their work: margin calls, profit taking and the classic selling of liquid winners to raise cash. In practice, investors have sold where they still had profits, which mechanically amplifies the correction but does not, in our view, call into question gold’s role as a strategic diversifier over the long term.
So, are we facing a true break in the cycle? We would not go that far. What we are seeing is an aggressive repricing, not a systemic failure. A market that has already learned that conflicts can drag on reacts differently from one discovering this regime for the first time. Positioning today is very cautious, with portfolios shifted much more defensively and, in some pockets, heavily short.
In that context, even a modest positive surprise – a first step towards de-escalation, an easing of supply fears on energy, a slightly softer tone from central banks or a pause in United States political tensions – could trigger a powerful short squeeze, as we have seen more than once in the past.
This is precisely why we favor discipline, selectivity, and flexibility over a wholesale exit from risky assets.
