On Tuesday, as geopolitical tensions in the Middle East abruptly escalated, global financial markets witnessed a rare scene of broad-based asset declines. Gold, bonds, and stocks were sold off simultaneously, with only the US dollar and crude oil prices strengthening against the trend. This anomalous phenomenon upended the traditional negative correlation between safe-haven and risk assets and significantly boosted cross-market volatility. Amidst the market’s thirst for cash, the logic of “cash is king” has once again come to the fore.
The trigger for the complete reversal in market sentiment was US President Donald Trump’s strong threat to strike Iran “no matter the cost.” The market reaction was swift and violent. Market data shows that besides a sharp rise in oil prices and a broad uptick in the US dollar (Symbol: DXY) against major currencies, major global stock markets, US Treasuries and other government bonds, and even traditional safe-haven asset gold all experienced heavy selling. The Nasdaq Composite Index tumbled more than 2% on Tuesday, while the S&P 500 Index fell to its lowest level in over two months. The two-year US Treasury yield briefly touched 3.599%, hitting its highest point since late January. Gold prices, which had reached four-week highs on Monday, plunged 4% on Tuesday.
Behind the market turmoil was a confluence of multiple factors. Analysts pointed out that the market’s previous excessive optimism regarding the US-Iran conflict, extreme positioning, and expectations that rising oil prices could exacerbate inflationary pressures and negatively impact the bond market collectively triggered the flight to safety. George Adcock, trading desk head at 36 South Capital Advisors, stated that investors are currently pricing in various potential outcomes, causing volatility to spike and putting pressure on previously overcrowded trades such as crude oil, gold, and the US dollar. He noted that the entrenched negative narratives and extreme positioning formed in January were being unwound, subjecting many portfolios to significant Value at Risk (VaR) shocks.
Dominating by risk-off sentiment, the demand for liquidity in the market surged sharply, further cementing cash’s dominant position. Michael Arone, chief investment strategist at Boston-based State Street Investment Management, analyzed that this is a typical market reaction to highly uncertain events. Oil and the US dollar are the only things people want to hold right now. Data from Vanda Research also showed that retail investors are heavily buying oil stocks, flocking to this perceived safe harbor.
David Kelly, global chief strategist at JPMorgan Asset Management, observed that the current fund flows are quite interesting: the dollar is strengthening, but funds are not flowing into US Treasuries as they typically would, which precisely reflects the market’s growing demand for short-term cash. Regarding the future trajectory of the US dollar, JPMorgan’s Kelly adopted a cautious stance. He believes the dollar’s rally is unlikely to be sustainable, especially if the conflict potentially exacerbates the US’s already fragile fiscal situation and economic outlook. He concluded, “Wars tend to start with shock and awe and end in quagmires, which is typically not good for the dollar.”
