Geopolitics Takes the Wheel

Macro

For months we've been flagging the shift from a policy-driven to a structurally-driven market. Tariffs, AI disruption, deglobalisation. That backdrop hasn't changed, but this weekend added a new layer: outright conflict.

Operation "Epic Fury" launched late Saturday with coordinated U.S.-Israeli strikes on Iran, targeting military sites and reportedly killing the Supreme Leader and top officials. Iran responded with drone and missile attacks across the region, hitting Israel, U.S. bases, Dubai, Abu Dhabi. As of Monday, the Strait of Hormuz is effectively closed, airspace across the Gulf is shut, and the conflict is intensifying rather than de-escalating. Trump has floated a four-week timeline; Hegseth hedged that it could stretch longer.

Markets reacted predictably. Oil surged 9%, briefly topping $80. Analysts raised their Brent forecast to $100. Gold is bid near $5,400, adding roughly $1 trillion in market value in a matter of hours. Equities gapped down at the open with the Dow off 500+ points at lows before trimming losses, while defense names ripped higher. The VIX hit its highest level of 2026.

This fits into the broader regime we’ve been seeing since the start of the year: flight to hard assets, value over growth, commodities over tech.

The immediate question for risk assets is how long this lasts. If it's a surgical, contained operation that wraps in weeks, the damage is absorbable. But if Hormuz stays closed and energy prices remain elevated, the second-order effects start to matter. Increasing energy prices can lead to more sticky core inflation. And sticky inflation means the Fed is more likely to stay on the fence. And Fed paralysis is already the trade that's been hurting growth assets all year.

Digital Assets

For crypto, this is macro-driven more than anything coin-specific. The weekend drop absorbed the first wave of geopolitical fear, and the rebound came from views that much pain was already priced in with BTC down 45% from ATH. But the energy angle is being underappreciated. Sustained high oil prices could keep inflation stubborn just as central banks were hoping for cooling, potentially delaying U.S. rate cuts further. Crypto sits at the wrong end of that trade.

ETF flows showed a welcome reversal late last week with over $1 billion in net inflows, breaking a five-week outflow streak. Year-to-date outflows remain heavy at ~$4.5B, but long-term holders appear sticky with much of the recent selling tied to speculative positions rather than institutional exits.

On the desk, institutional participation remains notably low versus the previous $85-95k range we traded in from November until September. Back then, there was considerably more activity, especially into weakness. At these levels, the bid simply isn't there. The market feels fragile.

Volatility reflects the shift. DVOL spiked from the 30s-40s to around 55, with volatility of vol making the biggest jump since 2023, with options pricing in 2.5-3% daily swings. And despite a heavy put skew on the option side and appetite to bid for volatility, there seems to be forming a consensus that mid to high $50s level for BTC would make very attractive risk reward on a 12 to 18 month basis.

Finally, altcoins continue following a typical bear market pattern as +ve performance is very short lived with little appetite to chase outperformance, making more sustained very unlikely in the majority of the names.

Our take:

“Despite a relief bounce on Monday, the market still feels fragile with volatility returning"

Crypto continues to get pressured as the highest-beta growth asset in a world where risk premia on growth are rising and the Fed can't act. The ETF outflow streak (now briefly interrupted) confirmed it. That's the near-term reality.

In more recent memory, growth scares have triggered rotations that ultimately reversed as risk appetite returned. The difference now is the structural nature of the headwinds: AI disruption, deglobalisation, and now potential for sustained energy supply disruption. Each reinforces the others. If oil stays elevated and the Fed stays paralysed, the rotation into hard assets, commodities, and value has further to run. In that case crypto will unlikely receive a bid.

That said, there's a scenario where this accelerates the hard-asset narrative in crypto's favour. BTC as digital gold has never fully delivered on that promise, but if the conflict drags on and traditional safe havens get crowded, some capital may look for alternatives. We're not there yet, flows don't support it, but it's worth watching.

For now, caution rules. The overriding focus is on conflict headlines, especially any progress toward reopening Hormuz or dialing back hostilities. If this drags beyond initial estimates, elevated energy costs could reshape rate expectations and pressure risk assets broadly.