Core Viewpoint - The Middle East conflict has led to a surge in natural gas and oil prices, disrupting the market consensus for a "cyclical" recovery expected in 2026, resulting in a cross-asset sell-off. Morgan Stanley warns that while the conflict is likely to be short-lived due to pressures from ammunition, market conditions, and midterm elections, investors should not rush to buy the dip [1][4][10]. Group 1: Market Reactions - The market consensus for 2026 was heavily skewed towards bullish positions in global stocks, bearish positions in the dollar, and bullish positions in gold, alongside high-yield forex and interest rate arbitrage in emerging markets [5]. - The sudden energy crisis caused by the conflict has led to a significant reevaluation of risk exposure, with natural gas prices soaring approximately 60% and oil prices increasing about 29% in the past week [6][10]. - The strong rebound of the dollar during this period reaffirms its status as a safe haven in times of market panic [6]. Group 2: Economic Implications - Morgan Stanley's baseline assumption is that the conflict will last only a few weeks, primarily due to limitations in ammunition stockpiles and logistical bottlenecks, which make prolonged conflict unsustainable [9][10]. - If Brent crude oil averages around $80 per barrel in the first half of the year, it would only mildly impact global GDP growth, reducing it by 0.6% and increasing CPI by over 1% without derailing global economic expansion [10]. Group 3: Investment Strategy - Investors are advised to wait for a "circuit breaker" before re-entering the market, which requires at least one of the following conditions: extreme valuation drops, significant cooling news headlines, or sufficient time for a feedback loop to develop [11][12]. - Currently, valuations do not appear attractive enough, and news headlines warrant caution, indicating that a feedback loop for cooling is still some time away [13]. - In the meantime, Morgan Stanley suggests a restructured cross-asset trading logic, favoring gold as a high-probability re-entry trade if the situation cools down [14]. Group 4: Sector Preferences - In equities, there is a preference for South Korean stocks due to their core position in the global AI storage chip supply chain, while European stocks are to be avoided due to the risk premium associated with fossil fuel imports [14][16]. - The energy-induced inflation risk has delayed market expectations for Federal Reserve rate cuts, with the first anticipated cut now pushed to October, and only a cumulative reduction of 50 basis points expected by July 2027 [16].