J.P. Morgan interprets the Middle East situation: The baseline scenario remains "short-term conflict," but investors need "specific conditions" to re-enter.

A storm in Middle Eastern geopolitics ruthlessly shattered Wall Street's "pro-cyclical" consensus for 2026. Facing the surge in energy and asset shake-out, JPMorgan warns: bottom-fishing capital is still waiting for the "starting pistol" of valuation, headlines, and time.

According to Chase the Wind Trading Desk, on March 6, JPMorgan released its latest "Global Market Strategy" report. After the US and Israel launched an attack on Iran, geopolitics instantly dominated global macro pricing, and the market is bracing for potential inflation and macro shocks.

Energy Surge Bursts the "Pro-Cyclical" Dream, Market Faces Cross-Asset Shakeout

The root of market panic is that the original script was simply too crowded.

Entering 2026, Wall Street's trading consensus was highly unified: long global equities, short the US dollar, long gold, short crude oil, and engage in high-yield FX and rates arbitrage in emerging markets. This is a typical "pro-cyclical" portfolio.

However, reality struck the market hard. Commercial traffic through the Strait of Hormuz has nearly stalled. Over the past week, natural gas prices have soared by about 60%, crude oil surged around 29%.

This sudden energy crisis directly triggered systematic deleveraging and large-scale shakeouts in the consensus positions above. Capital is forced to reassess risk exposures, and the US dollar's strong rebound again proves its irreplaceable safe-haven position during times of panic.

The "Three Ms" That Will Determine the Outcome of the Conflict and the Tail Risk of $120 Oil

Facing the crisis, JPMorgan's baseline assumption is still: This will only be a short-term conflict lasting several weeks.

The logic behind this is not complicated: constrained by ammunition stocks, logistical bottlenecks, and the high macro cost of closing the Strait of Hormuz, it is hard for the conflict to be sustained long term.

JPMorgan's geopolitical analysts pointed out sharply:

"At a certain point, resource risks will begin to outweigh increasingly marginal military gains. The outcome of the conflict will ultimately depend on three Ms: Munitions, Markets, and Midterms."

At the macro level, if Brent crude oil averages $80/barrel in the first half, this is a moderate shock. Models show it would only cause global GDP growth to drop by 0.6%, raise CPI by over 1%, not enough to derail global economic expansion.

But the risk lies in physical bottlenecks. Currently, land-based and floating storage capacities in the Gulf region are nearing their limits. If US naval escort and transit insurance plans are delayed, causing shipping not to resume and triggering forced shutdowns, the chain reaction will appear. Once storage is maxed out, crude prices face tail risk of soaring to $100-120/barrel. In comparison, the recovery cycle for natural gas is longer, as restarting liquefaction plants itself takes several weeks.

What's Missing for Bottom-Fishing?

Faced with significant asset price corrections, when can investors re-enter the market? JPMorgan's answer is: wait for a "circuit breaker" mechanism.

To enable investors to bottom-fish against the trend (fade the wash-out), the market needs to meet at least one of the following three conditions:

Extreme undervaluation;
Substantive cooling-off headlines;
A sufficiently long period to provide feedback for cooling-off the situation.

But the current situation is harsh. JPMorgan emphasizes:

"So far, valuations do not seem attractive enough, headlines keep us cautious, and there's still some way to go before a cooling-off feedback loop is established."

Cross-Asset Price Restructuring: Betting on Gold, Favoring Korea, Avoiding Europe

While waiting for the starting pistol for geopolitical cooling, and amid heated debate about whether AI foundational models will squeeze software profits, JPMorgan provides the reconstructed cross-asset trading logic:

Commodities: If the situation cools, supported by both fundamentals and technicals, going long gold is the most attractive and high-probability re-entry trade.
Equities (favor Korea, avoid Europe): Peak concern about AI in equities has passed. The "AI 30" targets alone will reach $750 billion in capex by the end of 2026. Structurally, favor underweighted low-volatility assets (Low Vol), and expect software stocks to outperform semiconductors in the US and emerging markets. Emerging market wise, Korea is very attractive due to its core role in the global AI memory chip supply chain. Conversely, Europe, as a major energy importer, faces fossil fuel risk premiums that will squeeze corporate profits and erode real incomes, so should be strongly avoided in the short term.
Rates & FX (rate cut expectations postponed): Inflation risk from energy has caused the market to postpone Fed rate cut expectations significantly. Currently, the market expects the first cut in October, and by July 2027, only a total of 50bps of cuts. Therefore, JPMorgan takes profits on "short 2-year US Treasuries" and shifts to "short 5-year US Treasuries." In FX, still bearish on USD mid-term, but bullish on AUD and NOK, which are tied to macro cycles, while remaining cautious on EUR due to energy pressure.

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