Energy Constraints

Macro

One week into the Middle East escalation and there seems no tangible path to de-escalation. Trump's initial four-week timeline looks optimistic, with administration officials hedging that operations could extend significantly longer. As a result, Brent oil is up 26% on the week, driven by the market's fear over longer-term energy constraints.

Last week, the U.S. announced it would chaperone and insure oil transport through Hormuz. Initial reports suggested this could restore some normalcy however that optimism seems to be fading. Reports suggest the operation is proving expensive and logistically difficult to sustain. As a result of limited throughput in Hormuz, some Gulf producers are considering shutting down oilfields with Aramco already cutting production at two fields. Not because of the conflict itself but because storage is at capacity with little place for the oil to go.

This ripples through to bonds and rate expectations. Higher energy feeds directly into CPI, making inflation stickier and narrowing the Fed's room to cut. At the same time, elevated energy drags on economic output, creating a more stagflationary environment that is harder to navigate. The U.S. has strategic reserves, but they're reportedly at around 50% capacity following drawdowns during the Russia-Ukraine escalation and Washington has shown little appetite to tap them further.

As a result, markets are now pricing in no cuts before Q4, with only one 25bps cut expected this year. Two weeks ago consensus was still split between two and three cuts.Risk assets are being repriced. Last week the S&P, Nasdaq, and Russell 2k were down -2.0%, -1.2%, and -4.0% respectively. Even gold is down on the week, likely due to margin calls and deleveraging. The value-over-growth and hard-assets-over-tech rotation we've flagged since January remains intact, with crypto being the notable exception.

Digital Assets

Crypto's relative outperformance stands out. BTC +0.4%, ETH flat, altcoins -0.4%, while everything else sold off. Spot volumes remain light but we've seen some pickup in institutional involvement over the past week, albeit still well below levels from earlier in the cycle.

After last week's spike, volatility remains elevated with DVOL chopping around the 60s. Put skew persists, though there's growing appetite for longer-dated OTM calls from those positioning for a recovery on a 12-18 month view.

Oil's rally and the inflation concerns it raises have put Bitcoin's" hedge"store of value" debate back on the table. What's notable here isn't just the macro backdrop, it's that Bitcoin held firm at a moment when most traders expected the opposite. That kind of price behaviour, holding strength against a risk-off catalyst, is exactly what tends to attract attention from investors reconsidering their inflation playbook. Whether Bitcoin acts as a credible inflation hedge remains debated, but moments like this do more to build that narrative than any number of theoretical arguments.

Our take:

“Marginal sellers are gone (for now), but conviction buyers aren't here yet"

Macro is driving everything right now, but crypto held up last week while equities, bonds, and even gold sold off. The elevated correlation to equities we've seen for quarters is starting to crack.

The most likely explanation: there simply aren't that many marginal sellers left. Leverage in crypto sits around $60B, roughly half of peak levels. Contrast that with gold where speculative positioning has built up meaningfully. When everything sold off, crypto had less forced selling to absorb.

This validates what we're hearing across the market. Current levels are looking attractive on a 12-18 month basis, though the range where people are willing to step in spans from here down to the low $50s. Room for another leg lower, but the bulk of the deleveraging is behind us.

Worth noting the disconnect between headlines and price action. Since Q4 2025 we've seen steady adoption news across the financial industry. U.S. regulation is moving slower than expected but still progressing, likely finalised before the midterms. A few years ago these headlines would have sent prices ripping. Instead, nothing. If correlations continue breaking down, that gap may start to close.For now crypto is holding up, closing the performance gap to other risk assets. Whether this lasts once volumes pick up remains to be seen. Next week's FOMC is the near-term catalyst as we'll learn more about the Fed's stance on the economic impact of the conflict. Escalation or hawkish pivot would screen bearish.