[CITIC Securities Overseas Policy Team] If the Middle East War Prolongs, How to Break the Geopolitical Risk Deadlock?

English summary

Over the past few months, Middle East conflict and supply disruptions have intensified extreme K-shaped divergence in global markets. We believe Middle East geopolitical risks face pressures for long-term continuation, likely remaining in a state of no stable agreements, stop-and-go warfare, and intermittent disruptions to Strait of Hormuz transits. Key reasons include: Iran's long-term strategic objectives determine the complexity; Houthi intervention mainly seeks 'political recognition' rather than simple alignment with Iran; and the constraining effect of midterm elections on Trump's war decisions should not be overestimated. However, historically, 'grand narratives' in geopolitics often see expectations 'blunted' after extreme crowded trades; geopolitical changes and market expectation shifts do not always align temporally. The tariff shock since last year is a typical example: after full repricing, market style may still trend toward equilibrium. Additionally, in 2H, we should watch potential changes in the Russia-Ukraine crisis. If parties enter substantive talks, lifting Russia sanctions is likely to be a key bargaining chip, which should hedge Middle East geopolitical and supply pressures in expectations, bringing a resolution to geopolitical risks and market expectations.