The war between Israel and Iran offered a real-time look at some new global cross-asset dynamics that can help investors understand the state of play in the first half of 2025 and what they can expect in the next six months.
Amid all the noise of the 12-day conflict, three points stood out.
First, the US dollar failed to mount any major advance during the roughly two weeks of the conflict, even though the DXY dollar index was sitting at a three-year low when Israel attacked Iranian nuclear facilities on June 13.
Second, the US Treasury market also failed to catch a bid amid the fighting, with the 10-year yield rising around 10 basis points right after the initial strikes. While yields have slipped since then, that appears to be related more to Federal Reserve dynamics than geopolitical drama.
And finally, there was oil, where the story was mixed. Prices jumped around 15% after fighting broke out, but then rapidly tumbled to pre-conflict levels once it appeared unlikely that there would be any significant supply disruption.
So, what does this episode tell us?
The real-time signals in the dollar and Treasury market reinforce the growing consensus that the US may no longer be the world's safe haven, the world's firefighter, if you will. Instead, in certain instances, America may now be the cause of the fire.
This speaks to perhaps the most important market trend of the past six months: the underperformance of US stocks relative to Europe and Asia.
Investors appear to be warming to the potential for a secular change in global equity leadership away from the US and towards the rest of the world. The MSCI ACWX index of non-US equities is up more than 13% year-to-date versus a roughly 1% gain for the S&P 500.
If this secular leadership shift occurs, it would be accompanied by more dollar weakness as a sustained period of capital repatriation out of the US plays out. This, too, is already showing signs of manifesting with the US dollar index down roughly 10% year-to-date.
The upshot of these trends is a rare outcome, notes European investment bank Societe Generale. A broadly diversified portfolio including non-US equity, corporate credit, and commodities has outperformed US equity in the year to date. That has only happened two times, on an annual basis, since 2009, according to SocGen.
Given all this, what asset classes may be well-positioned to outperform in the second half of the year and beyond? One contender could be a long-unloved asset class: commodities.
First, commodity prices are linked to global economic activity, and there are some bullish growth signals emerging despite the uncertainty about tariffs and geopolitics. For instance, the Citi Global Economic Surprise Index has recently picked up sharply, led by Europe.
On top of this, there is the Trump administration's new "run hot" approach to the US economy. As Treasury Secretary Scott Bessent indicated in an X post on May 18, the administration's goal is to stabilise the debt burden by ensuring nominal GDP remains above interest rates. This reduces the risk of a near-term US recession and, in turn, improves the global growth outlook.
And as I've previously argued, we could be in the beginnings of a long global growth cycle underpinned by increased spending in Europe, Asia, and North America, the three nodes of what I refer to as the TriPolar World. And that would be highly bullish for commodities.
Next, if the US dollar continues to weaken, this should provide a tailwind for commodity demand, given that most of these contracts are priced in dollars.
Continued dollar weakness, in turn, should allow emerging market central banks with policy space to cut interest rates and stimulate their economies without having to fear the negative exchange rate fallout. This should support both global growth and demand for commodities.
In terms of performance, commodities have lagged relative to stocks over the past decade, with the S&P GSCI commodity index generating an annualised return of under 3% over that period, versus more than 11% for the S&P 500.
Related to this, consider that the mining industry represented only around 1% of global stocks' market cap, a record-low, as of mid-May, according to an analysis by Crescat Capital.
And, importantly, commodities have recently appeared to be on the verge of breaking out on a technical basis, with the S&P GSCI index briefly eclipsing 580 last week as the Middle East conflict was heating up.
Of course, commodities could continue to lag if the Trump administration's chaotic economic policies weigh on global growth. But the president's actions since mid-April suggest that he has little stomach for upsetting markets or growth.
It's also possible that the "short dollar" trade, which has become crowded, could reverse. But considering how over-exposed many foreign investors were to US assets coming into 2025, this trade may still have room to run.
We obviously have no crystal ball to tell us whether Middle East tensions will rise again, providing more of a tailwind for energy commodities. But investors often wait for moments when fundamentals and technicals are aligned, and the cross-asset moves in recent weeks suggest that could now be the case for commodities. Reuters
Jay Pelosky is the founder and Global Strategist at TPW Advisory, a NYC-based investment advisory firm.