When Geopolitical Standoffs Break Market Momentum

US equity futures dropped 0.3% in early Asia trading after Trump rejected Iran's response to his latest nuclear proposal, basically killing the short-term hope of ending the war that's kept the Strait of Hormuz closed for ten weeks now. Brent crude jumped 2.7% at the open Monday. The dollar climbed against most major peers, with the pound getting hit especially hard as UK Prime Minister Keir Starmer faced pressure to resign after poor local election results.

Iran offered to move some of its highly enriched uranium stockpile to a third country but refused to dismantle its nuclear facilities, according to the Wall Street Journal. Iran disputed the report through its semi-official news agency Tasnim, but Trump called the Iranian response "TOTALLY UNACCEPTABLE" either way. That pretty much ended any near-term hope of reopening the Strait of Hormuz, which means oil stays elevated and energy stress continues.

This is a reality check after a scorching market run. The S&P 500, Nasdaq 100, and Asian equity gauges all hit fresh records last week on solid US earnings and signs the economy's holding up despite the energy shock. Global stocks had momentum, and that momentum just hit a wall.

Here's the thing that makes this pullback more interesting than just a headline reaction. The momentum strategy—basically piling into recent winners—has been the defining feature across markets for weeks. Junk bonds got pulled in. Crypto got pulled in. One equity momentum index closed Friday near its highest level since the global financial crisis.

Barclays strategists said the trade reached extremes that historically preceded selloffs. Goldman's trading desk wrote last week that valuations for high-momentum stocks are stretched and positioning is among the highest in recent years based on prime brokerage data. So the geopolitical rejection gave the market a reason to unwind what was already looking crowded.

This is where behavioral gaps between analysis and execution show up. Everyone could see the momentum trade was getting extended, but positioning stayed heavy because nobody wanted to be the first one out. Then an external catalyst forces the exit.

Friday's nonfarm payrolls showed 115,000 jobs added in April after an even bigger March surge, marking the strongest two-month increase since 2024. Unemployment held at 4.3%. The labor market's still solid, which is probably why equity futures are only down 0.3% instead of 1.5%. The foundation's intact even if the geopolitical overhang just got worse.

But inflation's not done. Consumer price index data comes out Tuesday, and economists expect a sharp 0.6% monthly increase for April. That's after March posted the biggest monthly advance since 2022. Energy stress is feeding through to broader prices, and the Fed's got no room to ease even if they wanted to.

Money markets are still pricing the Fed to stay on hold all year. They're basically waiting for the oil spike to play itself out before reassessing. That makes sense given the labor data, but it also means there's no policy cushion if something breaks.

The pound weakened ahead of Keir Starmer's speech addressing his leadership crisis after poor local election results. Starmer's laying out a plan to turn Labour's fortunes around, including taking the UK closer to the European Union a decade after Brexit. Brown Brothers Harriman's global head of markets strategy wrote that pressure on Starmer to resign has increased, but the risk of Labour pivoting further left has diminished, which should support the pound and gilts.

That's a weird dynamic. Political instability usually hurts a currency, but if the instability reduces the risk of more radical policy, the market reads it as stabilizing. It's a reminder that geopolitics doesn't always move markets in obvious ways.

The setup going into this week was already at extremes. Momentum positioning was heavy, valuations were stretched, and sentiment was bullish after weeks of gains. Then you get a catalyst that removes a key hope (Iran deal) and reinforces the energy overhang (Strait of Hormuz stays closed).

The initial risk-off move makes sense. Futures gap down, crude gaps up, the dollar strengthens as a safe haven. What happens next depends on whether this is just profit-taking on an extended rally or the start of a broader unwind. The economic foundation's still solid based on the jobs data, but inflation's accelerating and the Fed's stuck.

For context on how geopolitical shocks interact with market structure, this breakdown of the US-Iran conflict from earlier in the crisis explains why the Strait of Hormuz closure matters so much for global energy flows.

The momentum trade was already crowded before this headline. If positioning starts to unwind, the selling can feed on itself even without new negative catalysts. High-momentum stocks with stretched valuations are vulnerable to multiple compression if growth expectations cool or if the energy shock starts hitting earnings in a meaningful way.

The other risk is that Iran escalates instead of negotiating. The Strait of Hormuz has been closed for ten weeks, which is unprecedented in modern markets. If this drags on for months instead of weeks, the energy stress compounds and recession risks rise even with a strong labor market.

And then there's inflation. A 0.6% monthly CPI print would put year-over-year inflation back above 4%, which keeps the Fed sidelined and removes any policy flexibility if something breaks. That's a tighter risk management environment than what we had six months ago.

The S&P 500 hit a fresh record last week before futures opened down 0.3% Monday. The immediate support to watch is the prior consolidation zone around 5,650-5,680, which held multiple tests in April. A break below that opens up 5,550, which was resistance before the breakout.

Brent crude gapped up 2.7% at the open to around $88 per barrel. The key resistance is $92-95, which marked the highs from the initial Strait of Hormuz closure reaction in March. If crude breaks above that, it signals the market's pricing in an extended closure, not just a temporary standoff.

The dollar index climbed against most major peers, with the pound lagging. Dollar strength during risk-off moves is mechanical, but if DXY breaks above 106, that starts to tighten financial conditions globally and adds pressure to risk assets.

This is a momentum unwind on a geopolitical catalyst after a crowded rally. The economic foundation's solid, but the geopolitical overhang just got worse and the momentum trade was already extended. That's a setup where short-term volatility makes sense even if the longer-term trend stays intact.

The market's basically deciding whether to treat this as a headline fade or the start of a bigger reset. CPI data Tuesday will matter. If inflation comes in hot and crude stays elevated, the selling probably extends. If inflation moderates or if there's any sign of progress on the Iran front, the dip gets bought.

For now, risk-off at the open makes sense given where positioning was and what the catalyst removed. What happens over the next few sessions depends on whether the economic data supports the rally thesis or if the geopolitical risk starts feeding through to growth expectations.