2022 déjà vu! The Iran war triggers a "triple kill" of stocks, bonds, and gold on Wall Street, with cash positions surging to 4.3%.

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Global investors are responding to the current geopolitical situation in the same way as when the Russia-Ukraine conflict broke out in 2022—massively reducing holdings of stocks, bonds, and gold, and shifting funds into cash. The shock from rising energy prices is driving inflation expectations higher, putting simultaneous pressure on multiple asset classes, and stocks, bonds, and gold are experiencing a rare "triple drop".

On March 26th, according to Bloomberg, the latest investor survey by Bank of America this month showed that the increase in the amount of cash held by fund managers has hit a six-year high, with the proportion of cash holdings jumping from 3.4% in February to 4.3%. JPMorgan strategists pointed out on the same day that the position adjustments made by investors in response to the conflict may still have considerable room before completion.

JPMorgan’s strategy team led by Nikolaos Panigirtzoglou wrote in its latest research report: "From a historical perspective, cash allocation is still at a relatively low level, which poses resistance for stocks and bonds. As long as geopolitical and macro uncertainties remain elevated, this situation will persist."

Energy price surges drive up inflation expectations; rate-cut bets give way to rate-hike pricing

The primary concern for investors at present is that the energy price shocks triggered by war will drive up inflation, forcing major central banks to tighten monetary policy. Brent crude oil’s monthly increase is set to be the largest since 1990, with prices far above $100 per barrel. As a result, global stock markets dropped 5% in March, and falling bond prices pushed U.S. Treasury yields to multi-month highs.

Market expectations for the interest rate path have clearly shifted. Previously, traders bet that the Federal Reserve would cut rates in 2026, but now the probability for a rate hike before October is priced at 50%. In Europe, the expectations for rate cuts have been replaced by bets on three rate hikes of 25 basis points each.

Stocks, bonds, and gold all fall, with cash as the only safe haven

This round of adjustment features the rare phenomenon of simultaneous multi-asset selling. JPMorgan strategists pointed out, “Investors are abandoning stocks, bonds, and gold at the same time, shifting to increase cash allocation.”

Gold has declined over 15% since the conflict erupted. The prospects for central banks maintaining or even raising rates have diminished the appeal of non-interest-bearing precious metals, and traditional safe haven strategies have not worked in this round of turmoil.

Cash allocation still below historic extremes; market adjustment may not be over

Although the trend of funds flocking to cash is pronounced, the current level is still moderate compared to historical extreme periods. The Bank of America survey shows cash holdings have risen to 4.3%, while during the early stage of the Russia-Ukraine conflict in 2022 and the outbreak of COVID-19, this figure reached as high as 5.9%.

JPMorgan strategists also stressed that compared to the outbreak of the Russia-Ukraine conflict, current cash levels in portfolios are still moderate. This means that if geopolitical and macro uncertainties continue to intensify, there is still room for further accumulation of defensive positions, and the market adjustment may not be over.

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