Israel-Hamas Conflict: Just a Game of Volatility

1. The Volatility Game Under Geopolitical Conflicts.

During the weekend, the U.S. entered the scene, the Israel-Palestine conflict escalated again, continuing to be a core variable affecting the market in the short term—geopolitical risk premiums are rising, and funds are fluttering around looking for a "safe haven".

The escalation of the conflict originated on June 21, when Trump ordered B-2 bombers and Tomahawk missiles to destroy the three major nuclear facilities in Fordow, Natanz, and Isfahan. Trump claimed that the facilities had been "completely destroyed" and warned Iran not to retaliate. Subsequently, the US stated that "this attack was the entirety of the US plan," while Iran disclosed that it only hit the entrance tunnel of the Fordow nuclear facility. Iran also released news that senior officials were calling for the blockade of the Strait of Hormuz (which accounts for about 27% of the global oil transportation volume).

The news of conflict and easing is confusing, and market prices are fluctuating back and forth. Gold is overall showing a downward trend, with a weekly decline of 1.91%; under the dual influence of geopolitical risks and supply-demand fundamentals, crude oil is fluctuating upward, with a weekly increase of 1.18%; influenced by risk aversion, the dollar rebounded 0.63% to 98.78 after several months of decline, while the euro fell 0.25% and the yen fell 1.39%; in the last week, the US stock market only rose on Monday during four trading days, mainly due to the marginal easing of the situation in the Middle East.

This is also the typical trading pattern this year: no certain short-term results amid escalating deterministic friction.

Whether it is tariffs or the Israel-Palestine conflict, the main participants are playing a game of repeated jumps, so any one-sided bets are not suitable.

For example, last week's gold bulls wrongly anticipated the rapid disappearance of geopolitical risk premium, and the gold price retreated about 4% from the high of 3476 to around 3380 USD, making a wrong one-sided bet.

Crude oil prices are also swinging dramatically between two extreme scenarios.

On one end is the worst-case scenario: if Iran blocks the Strait of Hormuz, models from research institutions predict that oil prices could soar to $130 per barrel, and by the end of the year, there is a risk that it could push the U.S. inflation rate to nearly 6%, which would completely crush the market's long-awaited expectations for a Federal Reserve rate cut.

On the other end is an optimistic scenario: Iran may yield to pressure, signing an agreement to abandon its nuclear weapons development capability, essentially relinquishing the rights it has upheld for decades as a signatory to the Treaty on the Non-Proliferation of Nuclear Weapons, in favor of accepting a constrained path for civilian nuclear energy development or outsourcing.

WTI crude oil prices first rose by 7.55% on the 13th, then plummeted by 2.06% the next day, followed by a week of overall upward fluctuation. As long as the gunfire has not stopped, the market is still likely to continue to play out this "morning three, evening four" price fluctuation script, testing investors' nerves and patience.

At 10 PM, news broke that the Security Council would hold an emergency meeting:

A joke: As long as the UN intervenes, it proves that this matter is "just like that."

In other words, this conflict, even with its ups and downs, is likely to end up like this: meetings, votes, condemnations, everyone makes their stance, those who are being beaten and those who are doing the beating go back to their own homes, each looking for their own mother.

If the script develops like this, the probability of a surge in crude oil will rapidly decrease, and the inflation pressure in the United States may also ease, which would increase the probability of interest rate cuts. This could mean opportunities for both U.S. Treasuries and U.S. stocks. Of course, some friends say that Iran is now also fighting a desperate battle, with no way back; those who are barefoot are not afraid of those who wear shoes. If they can't deal with the U.S., they will focus on attacking Israel, and in the end, if Netanyahu is ousted, everyone will have 'won', and only then will this matter be considered over.

It's very lively, but there's no conclusion.

One thing that is certain is that the more chaotic the market, the more chaotic the market, the pessimism is often overly pessimistic, and the optimism is overly optimistic, and the extremes of emotions create opportunities for calm investors. Looking back at the first half of the year, the logic of asset allocation this year is very different from that of past years: before it was a one-way definitive investment such as betting on large technology stocks, this year it is clearly more profitable to diversify risk hedging strategies. **

For example, the "all-weather strategy" (which does not rely on forward-looking predictions and timing, but attempts to achieve a portfolio that can traverse cycles and has a certain applicability under different economic conditions through diversified asset allocation and dynamic adjustment, thereby obtaining relatively stable returns). This type of diversified investor, who was mocked in one-sided markets, has achieved remarkable returns this year.

This is not a coincidence, but rather the best adaptation to the current environment of high uncertainty—whether it is trade friction, concerns over dollar credit, or geopolitical conflicts, the strategy of diversifying risks has significantly outperformed the concentrated betting strategy by almost historic margins.

Compared to the enthusiastic discussions of the elderly gentlemen in the teahouse wearing vests about the future direction of the Israel-Palestine conflict, perhaps savvy investors should realize that in such a polarized market environment, the only reasonable stance may be to refuse to blindly take sides or bet on direction, but rather to consider diversifying assets when building an investment portfolio to cope with this year's Volatility game.

2. Data slowdown, remain inactive.

Another factor contributing to the increase in market volatility is the subtle changes in economic data and monetary policy direction between China and the United States.

The two major economies currently exhibit a certain degree of similarity—while the micro-level economic sentiment and pessimism continue to rise, the macro data still shows clear resilience. Economic readings have only changed slightly, making it difficult to find significant evidence of recession from public data. This split between the 'narrative' and 'sentiment' versus 'data' has become a significant source of market Fluctuation.

For example, in China, domestic demand data shows a strong consumption, weak investment, and resilient production situation.

In terms of consumption, the total retail sales of consumer goods in May increased by 6.4% year-on-year, hitting a new high since 2024. This strong performance benefited from the triple resonance of the Golden Week consumption boom, the 618 e-commerce promotion, and the trade-in policy for consumer goods. According to the data, the areas covered by the trade-in policy performed well under the dual stimulation of the national subsidy superimposed on the 618 promotion, with household appliances increasing by 53.0% and communication equipment increasing by 33%. At the same time, the economy continued to heat up, and the trendy toy track sprung up, with sports and entertainment goods, gold, silver and jewelry increasing by 28.3% and 21.8% respectively. On the production side, the performance was relatively stable, and although the industrial added value fell slightly to 5.8% from 6.1% in the previous month, it remained within a reasonable range. In terms of data, it seems that only investment has weakened significantly, and the cumulative investment in fixed assets in May increased by only 3.7% year-on-year, falling by 0.7 percentage points year-on-year to 2.8% in the month. Real estate investment has been declining for three consecutive months, and the area of new construction starts has been slow to recover (-22.8% this month, -23.8% in the previous month).

Tariffs seem to have had no impact on the US economy, which appears to be more resilient.

The labor market remains robust, with the latest data showing that initial jobless claims decreased by 5,000 from the previous week, in line with market expectations. Although the four-week moving average has slightly risen, it remains at a historically low level, indicating limited pressure on companies to lay off workers. On the production side, May data indicates that overall industrial activity is somewhat weak, but manufacturing continues to expand moderately, with automobile assembly rising more than 7% month-on-month. In terms of consumption, core goods consumption and import prices in May were both slightly stronger than expected. Benefiting from the upward revision of April's core retail sales and the surge in automobile assembly, Goldman Sachs has raised its second-quarter real GDP annualized growth rate by 0.4 percentage points to 4.2%.

In the context of such economic data, neither the "big news" expected from the Lujiazui Financial Forum, nor the LPR interest rate cut, nor the Federal Reserve rate cut has arrived as scheduled. The reason is simple: the macro data fundamentals do not support major moves in fiscal or monetary policy, and decision-makers are reserving policy space for potential economic downturns, choosing a cautious strategy of "holding steady".

It seems that everyone needs to "leave enough policy space", as the world experiences the same fluctuations.

However, the more the wind is still, the more the heart is agitated. This kind of policy silence has become a catalyst for stimulating the current market volatility. The current market is in a peculiar state of "reality unchanged, trading expectations" where the repeated mismatch between policy expectations and actual operations further exacerbates market uncertainty and the fluctuation of asset prices.