Whalesbook
Mideast Conflict Fuels Energy Prices and Dollar
Asian equities faced turbulence on Thursday, reflecting cautious investor sentiment driven by escalating Mideast tensions. The conflict, now in its fourth week, has significantly impacted global energy markets, pushing Brent crude futures toward $103 per barrel and setting it up for substantial monthly gains. This surge in energy prices has renewed inflation fears and prompted central banks to reconsider their policy paths. The U.S. dollar remained strong, sought by investors seeking safety amid global uncertainty.
Asian Markets Show Divergence Amid Inflation Fears
Despite broader regional challenges, select Asian markets have shown unexpected strength. Japan's Nikkei 225 index recorded a notable 10.37% gain in February 2026, partly due to political stability following an election outcome. South Korea's KOSPI index surpassed 6,000 points in late February 2026, driven by strong performance in AI and semiconductor sectors. However, the MSCI Asia-Pacific ex-Japan index is heading for its largest monthly drop since October 2022.
Gold's Unusual Retreat Baffles Investors
A contrary trend has been gold's performance. The precious metal has seen a significant monthly decline of approximately 14.5%, falling to around $4,514 per ounce on March 26, 2026. This happened even as Mideast tensions grew, a scenario that typically boosts gold as a safe-haven asset. Analysts point to investors favoring energy assets and the dollar for safety amid ongoing inflation fears and expected higher real yields. The European Central Bank, citing Mideast war-linked energy prices, raised its 2026 inflation forecast to 2.6% from 1.9%, while lowering GDP growth projections to 0.9%. The Federal Reserve also forecasts higher inflation, with PCE and Core PCE expected at 2.7% for 2026. This has led markets to price out rate cuts for the year.
Analysts highlighted U.S. refiners like Valero Energy, HF Sinclair, and Marathon Petroleum for strong performance and P/E ratios of 14-16, benefiting from refinery strength during geopolitical risks. Mizuho expects an oil market recovery in the second half of 2026, though near-term challenges remain.
Central Banks on Alert as Inflation Persists
The market's response to the Middle East conflict shows a shift away from traditional risk hedging, especially concerning gold. Its sharp decline, despite escalating geopolitical tensions, suggests inflation fears and dollar strength are outweighing demand for safe, non-yielding assets like gold. This leaves investors who expected gold to hedge against wartime threats vulnerable. Asian economies, which rely heavily on energy imports and shipping routes like the Strait of Hormuz, face greater risk from sustained energy price volatility. While indices like the Nikkei and KOSPI have recently gained strength due to domestic factors like AI and semiconductors, their longer-term outlooks are mixed. The KOSPI, for example, is forecast to fall to 4657.33 in 12 months, suggesting potential future weakness despite its recent rally. Ongoing risks of supply disruptions in key energy chokepoints, like the Strait of Hormuz due to Iran's attacks on shipping, could extend market uncertainty and harm global trade.
Central banks remain cautious: the ECB held rates steady while raising inflation forecasts, and the Federal Reserve also paused rate cuts amid high inflation expectations. Analysts suggest caution for broader Asian markets due to ongoing energy risks and limited policy choices, though specific sectors might still perform well. Markets seem to be adjusting their response to geopolitical shocks, favoring inflation hedges and resilient assets over traditional safe havens for now.