How to act in times of geopolitical tensionNASDAQ 100 IndexNASDAQ_DLY:NDXLonesomeTheBlueAny geopolitical tension is reflected in market pricing, let alone direct military action. The morning of February 28 was marked by yet another military conflict in the Middle East. Like any armed conflict, it carries severe consequences for both the economy and the population of the country in which it takes place. Let’s break down how an armed confrontation in the Middle East moves markets across the globe. Capital Flows Into Defensive Assets To begin with, during almost any period of geopolitical tension, capital traditionally flows into a defensive basket. The primary reason is uncertainty. Thousands of unknown consequences that markets must begin pricing in immediately act as a discounting factor. Evidence of this could already be observed today (over the weekend, when traditional markets were closed) via pricing providers that operate during non-standard hours. Perpetual futures (a type of futures contract with no expiration date) tied to oil jumped approximately 6.2% to $70.6 per barrel on the crypto exchange Hyperliquid, while gold and silver futures rose more than 5% and 8%, reaching $5,464 and $97.5 per troy ounce respectively. These moves may provide some indication of how these markets could react once regular trading resumes on Monday. Tokenized gold instruments also advanced: Tether Gold climbed to $5,470 per troy ounce, and PAX Gold reached $5,590. The Strait of Hormuz — A Direct Market Driver One of the main factors directly impacting financial markets is blockade of the Strait of Hormuz. Approximately 20% of all global oil passes through the Strait of Hormuz. If it were to be blocked even partially, the global economy would experience a shock. By disrupting this route, global oil prices would automatically surge, dragging inflation along with them. Under such conditions, one could reasonably expect: • A 1–2% increase in global inflation • Oil prices rising toward $120 per barrel If the strait were blocked even for just several days, not to mention a prolonged disruption. In addition, wartime insurance premiums for tankers operating in the Persian Gulf would increase due to the risk of attacks, which would further push oil prices higher. Historical reference: “2019 (attacks on two tankers in the Gulf of Oman): Brent +2–4% in one day, followed by additional gains. Insurance premiums increased multiple times.” Macroeconomic Transmission High oil prices translate into rising costs for all companies: • Airlines • Transportation • Chemical industries • Manufacturing A new wave of inflation could also result in the Federal Reserve maintaining elevated interest rates, which becomes another powerful pricing factor. Countries Most Exposed China — 14% of imports from Iran in addition to Saudi supply. India — 50%+ of imports pass through the strait. Iran loses 90% of its export revenues. Closing the strait would amount to economic suicide, considering oil accounts for 35% of GDP. Europe — direct dependency is relatively low: only 5% of gas and 12% of petroleum products come from the Gulf. However, global price increases hit the economy, eroding recovery after 2022–2023. Japan — 70–75% of oil and ~60% of LNG pass through Hormuz. 87% of total energy consumption is imported fossil fuels. South Korea — 60–68% of crude oil; 81% of total energy is imported. Short-Term Beneficiaries In the short term, the United States, Russia, Norway, and Canada — as oil exporters — benefit. Higher prices allow them to generate additional revenue. However, inflation prevents them from fully enjoying these gains. Strikes on Iran are a reminder: markets fear uncertainty more than war itself. When risks of energy supply disruptions arise, investors immediately shift into defensive mode: • Equities come under pressure • Volatility increases • Demand for safe-haven assets — gold, U.S. Treasuries, the dollar — rises sharply Defense and energy companies may experience inflows, but the broader market becomes nervous. A short conflict — markets recover quickly. A prolonged one — fear and uncertainty pressure sentiment for months. Our Strategy: Rebalancing Into a Defensive Basket What Is a Defensive Basket? A defensive asset basket is a group of financial instruments that investors use to minimize risk during periods of economic instability, recession, or market turbulence. Its primary objective is capital preservation and portfolio stability under unstable conditions. Key Characteristics: • Low or negative correlation with risk assets (equities, corporate bonds) • Stable value or a tendency to appreciate during market stress • High liquidity Composition of the Defensive Basket Gold and Silver Gold — the traditional “safe” asset. It is considered a capital refuge, especially during periods of high inflation, geopolitical risk, or market downturns. Silver — possesses defensive characteristics but is more dependent on industrial demand, which makes it less resilient during crisis periods. U.S. Dollar The world’s reserve currency. Its value typically rises during periods of global risk due to demand for liquid and reliable assets. A strong U.S. dollar means that equities, indices, and currencies inversely correlated with USD tend to show weakness. Japanese Yen The yen often strengthens during periods of market stress. This is related to its role as a funding currency (carry trade) and Japan’s stable economy. Swiss Franc A reliable currency associated with Switzerland’s political and economic stability. U.S. Treasuries Long-term U.S. government bonds are considered risk-free assets. Their yields decline (prices rise) when investors seek protection. Gold — Technical Perspective In the current geopolitical context, there remains a high probability of gold advancing toward new historical highs — targeting the 5,612 region with potential expansion toward 6,000. From a technical perspective, there are no significant problematic zones on the path toward these targets. The only restraining factor may be a seller reaction near the historical high (ATH), where liquidity traditionally concentrates and profit-taking may occur. Silver — Technical Perspective Silver also demonstrates potential to update its historical high — with 121 as the reference level. From a technical standpoint, the situation is more ambiguous. Price is currently trading within a local sideways range between two problematic zones — a Tested FVG and a BPR — which creates short-term uncertainty. • Key attention should be paid to liquidity interaction: • Engagement with SSL and BSL Acceptance above the key extreme Consolidation above a significant level indicates readiness by large participants to absorb opposing pressure and support higher prices. Additional confirmation would come from the formation of a new imbalance. Oil — Bullish Order Flow However, the list of interesting instruments does not end here. Iran is one of the key oil exporters, and approximately 20% of global oil supply passes through the Strait of Hormuz. Any escalation in the region creates supply disruption risks, which logically translates into upward pressure on oil prices. Technically, everything looks as it should: • Price respects bullish zones of interest • Price does not respect bearish zones • During corrections, institutional players accumulate long positions while working through liquidity All of this indicates bullish order flow. There is no need to invent anything. We work alongside large market participants — maintaining a long bias. Next interesting targets: Of course, it is important to understand that the key driver is the current geopolitical situation, and the driver of price appreciation is further escalation. Short-Term Tactical Focus Strengthening of the U.S. dollar under such conditions increases pressure on assets inversely correlated with USD. Accordingly, equities, stock indices, and currencies sensitive to dollar dynamics may demonstrate relative weakness. In the short term, is this an opportunity to search for short positions in: • The euro • The British pound • Selected European and American indices • The cryptocurrency market Additionally, if holding exposure to CNY, INR, IRR, SAR, JPY, or KRW, a rational decision under rising global risks may be partial conversion into U.S. dollars or Swiss francs as more defensive currencies. P.S. Should we prepare for Black Monday? Please share your thoughts in the comments.. Enjoy!