Oil Up, Stocks Down To Start Week As War Escalates & Gamma Unclenches

Oil & Stocks Mixed To Start Week As War Escalates & Gamma Unclenches
Update (1845ET): After an initial kneejerk higher in oil and lower in stocks, things have settled a little with both hovering around unch...
Brent is sliding a little from Friday's highs...
Equity futs are back around unch...
There's a long way til dawn...
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Following a weekend where geopolitical headlines swung from "winding down" (Friday after the close) to threats, deadlines, and "obliteration" tit-for-tat talk suggesting no end in sight, it is perhaps no surprise that oil prices are up (and so equity futures are down) as we open Sunday night.
WTI topped $100 again (but is fading back a little from the opening spike)...
Futs are down around 1-1.5% from the after-hours highs on Friday...
10Y TSY futs are down, implying around a 4-5bps rise in yields...
Gold is flat, holding around $4500 (after its worst week in 43 years).
Bitcoin has been sliding all weekend and is back below $68k now...
Investors are finally beginning to price-in the Iran conflict as a longer energy shock, not a temporary geopolitical scare.
With no end in sight, Goldman Sachs trader, Shreeti Kapa says it feels like market has started to reflect inflation risk from a transient energy shock but not really growth downside from a longer lasting shock.
Markets have mostly priced a rate shock but limited growth risks.
This is much in contrast to the energy shock in 2022, which also led to a much larger negative rate shock as real yields sharply increased from negative levels
This reflects a belief still that the war & resulting energy disruptions will be relatively short-lived.
If that confidence is misplaced and the energy price increases prove more durable, markets will need to price in a more significant hit to global growth and earnings & inevitably more significant drawdown in global equities.
As Bloomberg macro strategist, Michael Ball, highlighted earlier, higher energy costs are inflationary and act as a tax on consumers, margins and confidence.
That helps explain why central banks talked tougher this week, causing markets to price a shift to more restrictive path for global monetary policy. Traders moved quickly, pricing in ECB and Bank of England tightening and taking out all the Fed’s easing this year. At one point, bets even emerged for a Fed rate hike.
Central bankers don’t want to repeat the mistakes of 2021 and 2022 by being late to act and erring in their assessment of the strength and duration of inflation. But rate hikes get harder to deliver as growth weakens and labor markets loosen, especially because financial conditions often tighten well before the first move is actually made.
The rates market is already hinting at that tension. The front-end repricing story overshadows any clean duration selloff as policy-error fears begin to show. Hawkish rhetoric can lift two-year yields fast. It’s much harder to persuade the long end that economies can absorb a full tightening cycle on top of a prolonged energy shock.
So now, the only question that really matters is how long the Strait of Hormuz will remain closed.
Simply put, the answer to everything depends on one binary variable – duration of the war.
That in turn depends if there will be safe transit of oil vessels through the Strait of Hormuz. Even if the strait is opened, would we be able to restore oil flows to pre-conflict levels? What is the guarantee for safe passage? Can any ceasefire be trusted? For how long would that hold?
As Goldman's Kapa explains, the core problem with binary risk is that traditional diversification doesn’t help much – you can’t diversify away a single exogenous event that reprices everything simultaneously. So the playbook will need to shift from optimizing the portfolio to structuring it around the outcome tree
Few ways to think about it
Barbell – own the tails & reduce the middle. As an example long energy, defense, defensives, high quality, secular themes on the “conflict persists” side. Long the high beta, cyclicals, rate-sensitive, consumer discretionary themes on the “quick resolution side”. Underweight everything that needs a benign middle path like expensive stuff that needs both low rates AND strong earnings!
Reduce gross, not just net – In a binary, your net view matters less than your sizing. Even a high conviction directional call can be wrong if the binary resolves the other way. The smart move is cutting gross exposure so the wrong outcome doesn’t impair capital – thus preserving the ability to reload once the binary resolves
Own the resolution not the anticipation – Historically best entry point in geopolitical binaries is just after the resolution – not before. Holding dry powder and waiting for binary to resolve is often better risk-adjusted than guessing direction beforehand
Options – use options rather than one-delta positioning to capture left & right tails. Conscious at current VIX levels, this is rather expensive
The options market has just cleared one of the largest structural events of the quarter, as Friday's OPEX saw nearly $1.4 trillion in delta notional expire for the S&P 500.
But as SpotGamma explains, because significant positions have now rolled off from the March expiration, the market has lost an important stabilizing force just as macro pressures begin to build.
The loss of stabilizing positioning from March OPEX comes at a particularly precarious moment.
SPX has broken below the 6,600 Put Wall, closing Friday at 6,506 and now down over 7% from January highs.
These dynamics may finally put the nail in the coffin on the range-bound environment we observed at the start of 2026.
Even in the best case scenario, this tell us that we're not out of the woods yet. The worst case scenario tells us to hold on tight.
At least through quarter-end, major indices appear increasingly susceptible to larger directional moves.
While this volatility could manifest in terms of dramatic upside as well as downside, heightened put skew indicates that traders are largely hedging against the threat of a continued selloff.
Bear in mind that President Trump's 48hr deadline is set to end tomorrow (Monday) night at ~7pm EST.
Markets have not capitulated yet, but the slow daily derisking may be more troubling as investors increasingly throw in the towel and price a higher chance of stagflation the longer the war drags on.
So, with all that in mind, Goldman's Kapa notes, binary risk environments reward optionality and liquidity over conviction.
Investors that do well in such instances aren't ones that call the bottom correctly, they are the ones who had cash to deploy when uncertainty cleared.
Given near zero equity risk premium and all time high valuations across regions & sectors today, cash is actually a reasonable asymmetric position – you give up almost nothing in expected return and gain significant flexibility !
Professional subscribers can read much more from Goldman's Sales & Trading team here at our new Marketdesk.ai portal