GM. This is Milk Road Macro, the newsletter that tracks markets closer than your friend stalking their ex on Instagram.

Here’s what we got for you today:

• ✍️ Middle east tension moves oil, not stocks

• 📊 What was your main investment move when the Middle East conflict began?

• 🍪 Gold’s impressive run is set to end

MIDDLE EAST TENSION MOVES OIL, NOT STOCKS

Israel and Iran are at war.

Missiles are flying all over the Middle East.

The price of oil has been spiking.

And social media is full of World War III talk.

But what does this mean for financial markets?

Will risk assets like stocks and bitcoin be negatively affected?

And what about the price of oil - is this important?

Let’s take a look…

So, what’s happening?

Last Thursday, Israel began a huge attack against Iran, targeting nuclear facilities, energy facilities, missile sites, military bases, and Iranian leadership.

Reports indicate that Israel appears to have full air superiority over Iran, and has significantly degraded Iran’s nuclear weapons enrichment program.

However, there are nuclear sites buried deep within mountains and defunct mines that are extremely difficult to attack (unless aided by special US “bunker busting” munitions).

Iran has been firing barrage after barrage of rockets and drones back at Israel.

Iran is likely to keep up with the rocket attacks and attempt to overwhelm Israel’s “Iron Dome” missile defense system.

Currently, it’s hard to see any near-term path or motivation for de-escalation and the conflict could last for several more weeks at least.

So, what can we learn about market moves so far?

Gold is still the “risk-off king”

The immediate reaction last Thursday from risk-on markets like US stocks (S&P 500 -2%) and bitcoin (-5%) was to sell-off.

Bitcoin once again demonstrated it is not a “risk-off” asset.

It is not (yet) living up to its moniker of “digital gold” - at least in times of significant uncertainty.

Actual gold, meanwhile, caught a bid (+2%) in the hours after the conflict first began.

Gold remains the “risk-off king” and the go-to “flight-to-safety” asset.

What we saw on Thursday and Friday last week was a temporary “fear discount” being baked into risk assets.

However, the risk asset market impact of these sudden geopolitical events historically fizzles out very quickly on most occasions.

In fact, history shows that the overwhelming majority of military escalations and political shocks have turned out to be buying opportunities rather than sustained downturns. 

Barring a handful of exceptions, risk markets almost always dip briefly on initial fear, only to recover just as quickly once the worst-case scenario fails to play out. 

This is exactly what has happened this time (so far), with both US stock indices and bitcoin completely recovering last week’s drawdown.

The VIX (S&P 500 implied volatility) - AKA “the fear index” - was mostly contained.  

It saw a very small spike - but this was miles away from the post “Liberation Day” highs we saw just a few weeks ago.

Credit spreads (the difference in yield between two similar bonds of different credit qualities) also barely budged. 

If this conflict was to turn out to be something very serious for the global economy, credit spreads would be a lot higher. 

Credit spreads are showing no major concerns - and they are also still significantly lower than the recent post “Liberation Day” spike.

But there is one very important market that has been significantly affected…

It’s all about oil

Trump has spent the first six months of his administration attempting to push the price of oil down, relatively successfully.

He’s been cutting deals with Middle Eastern countries, and attempting to solve the Russia/Ukraine conflict (which hasn’t been working out very well so far).

But, since the conflict began in the oil-rich Middle East last week, a geopolitical risk premium has been attached to the oil market.

Brent Crude Oil initially spiked up more than 10% when the conflict began, but then fell back down and is currently up roughly 6% on its “pre-conflict” price at the time of writing.

The impact of geopolitical events on the price of oil typically fades out very quickly.

In the last 15 years, the highest price of oil was one week after Russia invaded Ukraine.

If the market was truly concerned about a long-term conflict having a significant and lasting impact on the oil market, crude prices would have already crossed above $100/barrel.

But why is oil so important?

Because it has a massive impact on inflation.

The crude oil price tracks very closely with US CPI.

A Bloomberg analysis indicates that a $70/barrel oil would put June CPI at 2.5%, $100 would see CPI at 3.2%, while $130 could see CPI rising all the way to 3.9%.

The recent oil price spike could also put a little extra pressure on global central banks to hold off cutting rates due to inflation concerns.

However, market expectations of Federal Reserve rate cuts have barely moved from where they were before the conflict began.

The market still expects the next Fed rate cut to be 25bps in September - little has changed here.

What about potential further escalation?

Closing the Strait of Hormuz would probably be one of the most extreme actions Iran could take in terms of global impact.

The Strait of Hormuz is a tiny sea passage measuring just 21 miles (34 kilometers) wide at its narrowest point.

Tankers haul about 16.5 million barrels of crude a day - about a fifth of the world’s daily output -  through the waterway.

It’s known as one of the most critical chokepoints in global trade.

Oil prices would certainly soar a lot higher immediately if Iran attempts to block the route.

Iran has repeatedly threatened to close the Strait in the event of an attack, but has never actually done so.

In theory, Iran could halt tanker traffic in the Strait for a short period by attacking or threatening vessels transiting the narrow waters. 

JP Morgan has warned oil prices could spike to $130 a barrel in the “severe outcome” of a blockade to flows via the Strait of Hormuz.

But the most likely response is that the US and its allies would immediately get involved.

Experts agree it would be extremely difficult for Iran to close the Strait for any extended period of time.

Odds of Iran closing the Strait of Hormuz in 2025 on Polymarket currently sit at around 30% at the time of writing, after being as high as 40% last week.

These odds seem too high to me.

Iran’s biggest oil customer is China, and attempts to block the Strait of Hormuz would likely disrupt Tehran’s own exports, cutting critical revenue. 

From an economic, military and political standpoint, shutting the waterway makes little sense.

Main takeaway: “nothing ever happens”

While it can be concerning to see worrying geopolitical headlines all over the news, it’s often best to fade these geopolitical events.

History shows there is rarely a lasting impact on risk asset markets.

Crude oil will be the most important price to track regarding the conflict, with potentially big implications for global inflation.

Although, it may well already have “topped” for the time being - and is unlikely to spike a lot higher unless Iran presses the “block the Strait of Hormuz” button.

And even this action would likely only have temporary effects.

That’s it for this edition - catch you for the next one.

POLL OF THE WEEK 📊

Last week, we asked how active you all are when it comes to managing your investments. Most of you said you "DCA and occasionally make trades when you spot an opportunity”.

Here are the results from last week’s poll:

This week, we want to know how you reacted to the recent Middle East conflict and the market moves that followed.

BITE-SIZED COOKIES FOR THE ROAD 🍪

G7 leaders urge 'de-escalation' but stop short of calling for Israel-Iran ceasefire. The leaders' statement said Israel had a right to defend itself, and that Iran should not have a nuclear weapon.

Trump’s Truth Social files for a dual bitcoin and ether ETF. The trust seeks to provide investors with exposure to both assets, removing the complexities stemming from direct investment.

Gold’s impressive run is set to end, according to CitiGroup. Analysts at the bank think the metal will sink back below $3,000 an ounce due to waning demand and improving global growth prospects.

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