Asian equities rose on Monday even as renewed conflict in the Strait of Hormuz drove oil prices sharply higher. Higher oil prices raised inflation worries and increased the chance of further central bank rate rises.
Japan’s Nikkei 225 was nearly 1% higher at 59,050. Hong Kong’s Hang Seng Index rose 0.60% to above 26,300.
China’s SSE Composite gained 0.59% to near 4,070. South Korea’s Kospi advanced 1.30% to near 6,270.
India’s GIFT Nifty was up 0.14% at 24,450, pointing to a positive-to-flat open for the Nifty Index. Traders were expected to remain cautious due to ongoing uncertainty.
Iran briefly indicated on Friday that the Strait would reopen, but reversed course on Saturday. This followed US President Donald Trump refusing to lift the blockade on Iranian ports.
Iran’s military said the US breached a ceasefire by firing on an Iranian commercial vessel and said it would retaliate. Trump said the US Navy fired on and seized an Iranian-flagged cargo ship in the Gulf of Oman after it did not stop when ordered.
Trump said on Truth Social that US officials would go to Islamabad for talks with Iran on Monday. IRNA reported that Tehran has declined to resume negotiations, citing “unrealistic expectations”.
Given the sharp rise in oil prices and the breakdown in US-Iran talks, we see a clear case for buying volatility over the coming weeks. The CBOE Volatility Index (VIX) has already surged over 30% to 22.5 this morning, reflecting rising market anxiety. Any further military escalation in the Gulf of Oman would likely send implied volatility even higher across asset classes.
The most direct trade is a bullish position on crude oil, with West Texas Intermediate futures already pushing past $98 a barrel. We remember how a similar, smaller disruption in the fall of 2025 caused a 15% spike in oil prices in under two weeks. Considering that over 20% of global oil supply transits the Strait of Hormuz, we are positioning for higher prices through long call options.
We should be wary of the current optimism in Asian equities, as sustained high energy prices will inevitably feed into global inflation figures. This could force central banks, including the Federal Reserve, to delay anticipated rate cuts or even adopt a more hawkish tone. Protective put options on broad market indices like the S&P 500 are a prudent hedge against a potential downturn driven by these inflation fears.
This kind of geopolitical instability typically triggers a flight to safety, which benefits the US dollar. The dollar index (DXY) is already showing signs of strength, and we anticipate it will test recent highs. This suggests a cautious stance on emerging market currencies, which are often negatively impacted by both a stronger dollar and higher energy import costs.
