Geopolitical crises are one-time disruptive factors; a decline is a golden opportunity!

Due to the impact of the Israel-Palestine conflict, the cryptocurrency market plummeted sharply on June 13, with over $1 billion in long positions liquidated within 24 hours. Ethereum bulls suffered particularly severe losses, with a liquidation rate as high as 60%. This crash caused ETH to break through $2800, which was characterized as a false signal for buying. Earlier, the aggressively bullish firm Trend Research was ridiculed by the market as a contrarian indicator. It is worth mentioning that after the outbreak of the Russia-Ukraine conflict in March 2022, Bitcoin saw a near 70% pullback within three months. Therefore, many investors view the escalation of the Middle East geopolitical crisis as a signal of historical repetition.

Current market concerns regarding the Middle East geopolitical crisis revolve around: rising oil prices potentially pushing U.S. inflation higher, thereby forcing the Federal Reserve to delay interest rate cuts. According to the pricing of federal funds futures, after Israel's airstrikes on Iran, the market reduced its expectations for U.S. interest rate cuts in the second half of the year from 45 basis points to 34.5 basis points. The probability of the first rate cut in September also dropped from 58% on June 7 to 47% on June 15. This change clearly indicates that geopolitical crises have indeed lowered the market's expectations for rate cuts.

However, despite the potential for the Middle East geopolitical crisis to push oil prices higher, the current global oil market supply remains ample. This is mainly due to the continued increase in production by major oil-producing countries, with U.S. crude oil production exceeding 13.4 million barrels per day (a surge in shale oil production), approaching historical peaks. These factors can effectively alleviate the supply shocks caused by geopolitical conflicts. JPMorgan estimates that the geopolitical crisis may bring a risk premium of $10-15 per barrel in the short term, but in the medium to long term, oil prices will still return to the fundamentals-driven range of $60-70 per barrel. Unless the Strait of Hormuz is blocked (with a probability of only 5%-10%), sustained surges are unlikely.

In summary, the Middle East crisis has limited long-term impact on U.S. inflation and is more of a short-term market disturbance. If the market continues to decline due to escalating conflicts, there may actually be a good opportunity to buy the dip.