By Daniela Hathorn, senior market analyst at Capital.com
Markets are increasingly pushing back against the idea that recent developments signal de-escalation. In fact, price action suggests the opposite. Despite attempts to frame the situation as manageable and short-lived, the tone of recent messaging reflects heightened tensions, reinforcing the likelihood of further escalation rather than resolution. Rising geopolitical risk is now clearly being reflected in markets, helping explain the current configuration: oil higher, equities lower and the dollar stronger. Investors are focusing less on the rhetoric of a quick resolution and more on the implications of what comes next. The key question is no longer whether tensions ease, but whether the next phase of the regional instability will involve direct disruption to energy infrastructure or prolonged instability in the Strait of Hormuz. Given the strategic significance of key actors, markets are increasingly pricing in the probability that disruptions to energy flows will persist. Instead, the approach appears to be centred on maximising economic pressure by constraining global energy supplies.
From a market perspective, the implications are significant. Any escalation that impacts supply, whether through direct strikes, retaliatory action across the Gulf or a sustained blockage of the Strait, would reinforce the current risk-off dynamic. Oil would likely remain elevated or move higher, inflation expectations would rise further, and financial conditions would tighten. That is the lens through which investors are interpreting recent developments, not as a path to resolution, but as increasing the likelihood of a more disruptive phase of the instability. At the same time, positioning is becoming increasingly fragile. The recent relief rally, driven in part by quarter-end rebalancing and short covering, is now being unwound as markets reassess the risks. This leaves positioning stretched and vulnerable heading into the Easter weekend, where liquidity will be thinner and the ability to react is limited. The timing of the US nonfarm payrolls release adds another layer of complexity, as markets will be closed when the data hits. That creates a significant gap risk, particularly if the data meaningfully shifts expectations for Federal Reserve policy.
In essence, markets are no longer trading the hope of de-escalation—they are trading the probability of escalation. Until there is credible evidence that the tensions are moving toward resolution, markets are likely to remain defensive, with volatility elevated and risks skewed to the downside.
Oil Brent Crude daily chart:
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