Middle East Tensions Influence Risk Appetite; Market Seeks New Pricing Anchor

Invest in stocks with the Golden Kylin Analyst Research Reports—authoritative, professional, timely, comprehensive—helping you uncover potential thematic opportunities!

| \| \| \| — \| \| 　　US Dollar Index Chart 　　Dow Jones Industrial Average Daily K-Line Chart 　　(Asset price charts as of 21:00 Beijing time, March 23) 　　Strait of Hormuz \| | | — | — | — | — | — | — | — |

Middle East geopolitical conflicts continue to disrupt global financial markets, showing a relatively strong US dollar index, while stocks, bonds, gold, and non-U.S. currencies generally face pressure.

This indicates that the market is re-pricing, with the valuation logic shifting from “safe haven” to “re-inflation defense.” If the situation further escalates, the valuation logic may switch to a “stagflation-recession trade.”

Analysts believe that in the long term, the pricing anchors for global assets are gradually shifting toward core variables such as strategic resources, fiscal sustainability, and geopolitical security. Against this backdrop, the trend of “de-dollarization” in the international monetary system may deepen further.

◎Reporter: Huang Bingyu

US Dollar Index Fluctuates and Rises

Since March, the US dollar index has shaken off its early-year weak trend and has been rising steadily, repeatedly returning to the 100 mark, with the dollar strengthening against major non-U.S. currencies like the euro, yen, and pound.

In comparison, major global asset classes such as stocks, bonds, gold, and non-U.S. currencies are generally under pressure.

On March 23, both the Japanese and Korean stock markets declined sharply. European and American markets had already fallen in the previous trading day: last week, the three major U.S. stock indices all declined, and major European stock indices also fell in sync, showing a clear global downward trend. The global bond market also experienced significant sell-offs, with yields on government bonds in major economies rising across the board, with the 10-year U.S. Treasury yield approaching 4.4%. In commodities, gold prices saw a sharp correction of over 10%.

The escalation of Middle East geopolitical conflicts seems to have reversed the previous “weak dollar” narrative: before the conflict broke out, the dollar was clearly weakening, with funds flowing out of dollar assets; after the conflict erupted, the dollar index rebounded sharply, and funds flowed back into the U.S.

Under the current circumstances, the dollar’s strength is mainly supported by two factors. “First, geopolitical risks generate safe-haven demand, leading global funds to flow into the dollar; second, rising oil prices have prompted adjustments in Federal Reserve monetary policy expectations—market expectations for rate cuts this year have narrowed from two cuts to almost none, and even the possibility of future rate hikes cannot be ruled out, which also supports the dollar,” said Lin Chengwei, Chief Macro Analyst at Zheshang Securities, to Shanghai Securities News.

Shift in Valuation Logic

The traditional safe-haven rotation logic of “stocks fall, bonds rise, gold rises” has been broken. A potential change is that the core market trading logic has shifted from “safe haven” to “re-inflation defense.”

“Currently, the dominant market driver is not just safe-haven demand, but liquidity panic and the pricing of ‘stagflation-like’ scenarios,” said Bai Xue, Senior Deputy Director of Research and Development at Dongfang Jincheng, to Shanghai Securities News. The market’s expectation of stagflation driven by high oil prices has shifted focus from safe haven to liquidity safety pricing. Since the dollar has liquidity advantages that other assets lack, institutions are forced to sell all risk assets to raise cash in dollars to meet margin calls and redemptions.

Under the logic of fully pricing inflation shocks, the phenomenon of pressure on various assets can also be explained.

Cheng Zeyu, Senior Analyst at United Credit Ratings’ Sovereign Department, told Shanghai Securities News that expectations of Fed rate cuts are rapidly declining, causing yields on traditional safe assets like U.S. Treasuries to steepen, which also puts pressure on gold, an interest-free asset, as real interest rates soar. Meanwhile, the environment of high interest rates combined with recession expectations exerts dual pressure on stocks through valuation and earnings. European, Japanese, and some emerging economies, due to energy dependence and other reasons, lack economic resilience, leading to short-term capital flight from risk assets and non-U.S. currencies into dollar cash with high liquidity and yield expectations.

Notably, due to Middle East conflicts, many economies’ growth forecasts have been revised downward recently: Goldman Sachs has fully downgraded growth forecasts for the U.S., Eurozone, and other major economies for 2026; the European Central Bank also announced downward revisions to GDP expectations for this and next year.

Does current asset pricing reflect concerns about a global recession?

Yang Zirong, Associate Research Fellow at the Institute of World Economics and Politics, Chinese Academy of Social Sciences, told Shanghai Securities News that the market mainly prices based on panic sentiment, inflation expectations, and recession factors. Currently, the first two dominate, and recession has not yet become a core logic. If the conflict lasts more than three months, market focus will shift from inflation to recession, and the valuation logic will change accordingly. The specific performance of global assets will depend on the tug-of-war between rising inflation and economic slowdown.

“Bai Xue said that the market is only pricing in inflation persistence caused by rising commodity prices, but has not yet priced in the long-term impact of high energy costs on corporate profits and household consumption. If the Middle East situation further escalates, the market will shift from ‘inflation shock’ to ‘stagflation shock,’ and even to ‘recession shock’ pricing.”

Seeking New Valuation Anchors

In the short term, how geopolitical developments unfold remains the key variable influencing global asset trends. Ming Ming, Chief Economist at CITIC Securities, told Shanghai Securities News that if the Middle East situation further escalates, combined with global investor expectations of continued tightening by the Federal Reserve, the dollar may remain strong. Under this scenario, other asset classes will face persistent stagflation pressures and liquidity tightening risks, potentially negatively impacting global economic growth.

“Once the market’s valuation logic shifts from ‘re-inflation trade’ to ‘stagflation-recession trade,’ the focus will no longer be on whether central banks maintain high interest rates but on re-pricing risks of corporate losses, credit defaults, and economic recession,” Cheng Zeyu said.

These changes and uncertainties suggest that the valuation logic centered on Federal Reserve monetary policy is evolving. Future global asset pricing will pay more attention to a country’s resilience under energy shocks and its ability to control inflation. Geopolitical security has become a core factor in asset valuation.

Yang Zirong believes that the short-term rebound of the dollar index will not change the long-term trend of “de-dollarization” in the international monetary system. Many countries will continue to promote de-dollarization to ensure energy and financial security, increasingly adopting bilateral local currency settlements. The future core of market pricing will gradually shift from Fed monetary policy to the security of supply chains for energy, minerals, and food.

Cheng Zeyu thinks that future market pricing will likely consider core variables such as strategic resources, fiscal sustainability, and geopolitical security: first, energy and key strategic resources are no longer just cyclical commodities but also “hard currencies” with monetary attributes; second, investors may gradually lose blind faith in U.S. credit and instead conduct strict stress tests on the fiscal sustainability and debt repayment capacity of sovereign entities, with sovereign credit risk premiums becoming key variables; third, supply chain resilience will determine the valuation center, and economies with resource autonomy and security barriers will enjoy significant valuation premiums.

Global capital flows will become more concentrated in safe assets. “In a turbulent global environment, stability will become a competitive attribute,” Ming Ming said.