Yang Delong: In-Depth Analysis of Current Global Situation and Its Impact on Major Asset Classes

The Federal Reserve’s March meeting decision was in line with previous expectations, keeping interest rates unchanged and pausing rate cuts. This decision was mainly influenced by the escalation of tensions in the Middle East. In March, a sudden conflict erupted in the Middle East, causing international oil prices to surge sharply, rising from pre-conflict levels of $73 per barrel to $119 per barrel at one point. Oil is the lifeblood of industry, and a significant increase in oil prices will inevitably push up global inflation, especially directly impacting inflation in the United States.

The Federal Reserve has two monetary policy goals: first, to prevent inflation; second, to maintain full employment. Given the strong inflation expectations, the Fed could only choose to pause rate cuts and adopt a wait-and-see approach. From Powell’s remarks after this meeting, it is clear that whether to cut rates in the future depends on changes in the international situation and the performance of prices.

In recent months, US non-farm employment data has been less than ideal. However, for the Fed, the more important goal is to prevent inflation. Powell has always been cautious. Although former President Trump exerted significant pressure on Powell to accelerate rate cuts last year, Powell has held firm, maintaining his pace to preserve the independence of the Federal Reserve’s monetary policy and avoid interference from the president. The Fed is the central bank of the world and is not entirely a US government agency. Its monetary policy influences central banks worldwide. If the Fed chair were to follow the US president’s directives—cutting rates whenever asked—the Fed would become a political tool, losing its independence, which could severely damage the credibility of the US dollar. Therefore, Powell has maintained his judgment despite immense pressure.

In May this year, Powell’s term as Fed Chair will end, and he will be succeeded by the new Fed Governor Waller, who was nominated by Trump. Waller is known for his hawkish stance. Investors worry that Waller might pursue balance sheet reduction to withdraw liquidity, but he is unlikely to raise interest rates because Trump would not nominate someone who completely disregards his instructions. I expect Waller might consider cutting rates after taking office, possibly as early as June, or at the latest, delaying until the end of the year, depending on how long the Middle East conflict persists and how long oil prices stay high.

Iran has already blocked the Strait of Hormuz, a critical chokepoint for global oil shipping, controlling about 20% of the world’s oil trade and transportation. If the Strait remains closed, international oil prices will stay high. Trump has sent multiple naval fleets to escort ships through the Strait, but whether the security alert will be lifted remains uncertain. Shipping companies are worried about escort failures and the risk of tankers being sunk, which could cause huge losses. Currently, insurance companies are refusing to insure ships passing through the Strait due to the high risk.

The uncertain outlook in the Middle East and sustained high oil prices significantly influence the Fed’s monetary policy decisions. The decision not to cut rates aligns with market expectations and has limited market impact. As the world’s central bank, the Fed’s decision to keep rates steady may discourage other countries’ central banks from easing liquidity or cutting rates, generally exerting a negative effect on global capital markets.

Recently, the Chinese A-share market has experienced a significant correction. On one hand, the increased uncertainty from the Middle East conflict has dampened outlooks; on the other hand, the Fed’s decision to hold rates steady has raised concerns about whether the central bank will further loosen monetary policy. These factors have affected short-term market trends. International gold prices reacted strongly, with recent sharp declines largely reflecting market expectations of delayed Fed rate cuts. Gold, as a safe-haven asset, should theoretically rise amid global turmoil, but instead, prices fell sharply, indicating market reactions to the postponement of rate cuts.

The long-term trend of gold depends on de-dollarization. Over the past few years, I have been optimistic about gold’s long-term prospects. I believe that with the US government’s high debt levels and increasing dollar issuance, de-dollarization will push gold prices denominated in dollars higher. Gold has already broken through $5,000 per ounce in the short term, with accumulated profit-taking pressure. The recent decline is mainly due to profit-taking and market correction, not just the delay in Fed rate cuts. In the short term, gold prices are expected to fluctuate and digest profits, but I remain confident in the long-term upward trend of international gold prices.

Although the US has attempted to reshape dollar hegemony through war—especially to reinforce the petrodollar system—such efforts may backfire. Many countries are pushing for diversification of trade currencies, as reliance on the dollar exposes them to risks of US sanctions and dollar dominance. The long-term trend of de-dollarization will continue, and gold prices are expected to rise over time. Investors should consider gold as a long-term asset, not overly focusing on short-term fluctuations. Every significant dip can be seen as a buying opportunity. I have recommended maintaining about 20% of a portfolio in gold assets over the past few years, and this strategy remains valid. The recent decline offers a good entry point. It’s impossible to buy at the absolute lowest point; the bottom is determined by market dynamics and confirmed only afterward. Investors can adopt a phased approach to accumulate, avoiding lump-sum purchases. Gold prices have fallen over 10% from recent highs, with an expected maximum correction of around 20%. The downside potential is limited, so averaging down during dips is advisable.

Due to the blockade of the Strait of Hormuz and the ongoing US-Iran conflict, with no signs of resolution, and Trump’s verbal hopes for a quick end to the war, the short-term outlook remains uncertain. This situation is likely to push oil prices higher again after some correction. If the conflict persists longer, oil prices could rise further. If the US deploys ground troops, prolonging the war, oil prices could hit record highs. Rising oil prices are an uncertain factor for the global economy because oil is essential for industry. Higher oil prices significantly increase production costs across sectors, raising global prices and causing imported inflation. Many countries can only pass these costs onto consumers through higher prices.

For China, rising oil prices increase industrial costs, narrowing PPI declines or even turning PPI positive, leading to rising industrial product prices. We should boost domestic demand, stimulate consumption, and help industrial enterprises absorb higher costs by raising prices appropriately. Meanwhile, China is actively developing new energy sources—such as solar and wind power—aiming to replace traditional energy and reduce reliance on imported oil, especially in power generation. According to statistics, the total capacity of solar and wind power has already surpassed thermal power, indicating significant success in the renewable energy strategy. This development has greatly reduced dependence on oil and coal, helping China stay resilient amid international turmoil. China’s oil reserves are ample, so short-term oil price increases and Strait of Hormuz instability have limited impact on energy security. However, prolonged conflict could gradually intensify risks. If oil prices stay around $110 per barrel, it will benefit domestic oil and gas companies’ profits but negatively affect chemical industries due to higher raw material costs. If the Strait remains blocked for an extended period, oil reserves will deplete, import costs will rise, and profits of the three major oil companies could be affected. Ultimately, these impacts depend on the security of international oil transportation and how long high oil prices persist, with short-term and long-term effects differing.

(Author: Chief Economist and Fund Manager at Qianhai Open Source Fund)