Symmetrical convexity

Barbell

It’s an interesting moment in markets now as fast money is out of EM longs after two rounds of blowups in MXN, HUF, COP, KOSPI, and so on. Real money is still mega long EM as it has been churning out a 2 or 3 Sharpe for ages, and they are much slower to pivot. Rising vol will continue to force degrossing. That said, we are in the rare moment where convexity goes both ways.

Given the opaque strategic goals of the US/Israel attacks on Iran, the administrations can declare victory at any time and say they did what they were hoping to do. Given the nuclear facilities were already destroyed in June 2025, then now not destroyed… They can easily be declared destroyed again, for example. If and when Truth Social lights up with a “WE DID IT! WE WON THE WAR!” message, EM, AUD, and many other assets will absolutely rip.

On the other hand, as refineries fill up, export bans hit, the Strait of Hormuz remains troubled, and so on… Crude will keep creeping higher and will probably trigger another round of convex liquidation as we see 95/100 in CL and/or Brent crude. Normally markets are convex in the direction of risk aversion, but right now markets are convex in both directions.

The degree of forced selling and hedging can be seen in options market skew.

I think that chart shows perfectly that:

1. We have seen some deleveraging and unwinds in popular positions (long EM and long AUD were two popular positions in FX this year).
2. There is plenty more downside if this conflict in the Middle East continues. We are nowhere near the levels of panic seen around Liberation Day, Russia/UKR, or the tech selloff in 2022.

To me, the path of least resistance remains higher oil, and weaker EM, but there is always going to be a risk of a declaration of victory and end of the war. You cannot really trade in front of this because the war could be over next week, or in 2027. You just have to be ready.

One major catalyst that could trigger the end of the war is a rise in oil prices to $95-$100. The administration has shown in the past that the markets are the ultimate arbiter of U.S. policy (that’s where the TACO acronym came from) and if oil gets near $100, I believe the intestinal fortitude will break down and you will see a recalibration or end of the war. So if we get there (Brent is 88, CL is 86), I will get busy buying topside AUDUSD, TLT, and KOSPI and downside in USDBRL and EURHUF.

Somewhat related tweet from Kevin Muir:

To summarize my view:

• Path of least resistance is higher oil and weaker EM as the market is still fairly complacent. Fast money is out, but real money is still massively long all the high-Sharpe favorites.
• If CL trades above $95, prepare for a declaration of victory from the US on the War in Iran.
• There is currently convexity in both directions for EM. This is rare. Normally it goes up the escalator and down the elevator. Now there is elevator service in both directions. This has important implications for trade structuring because options markets are heavily skewed in the direction of risk aversion and more guano hitting the global fan.

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Gold

You can love the structural story as much as you like… Gold is lower one week after a major surprise war in the Middle East. That’s not bullish. Gold and silver have become risky assets due to retail herding. This will not last forever, but it could be the reason we correct back to $4500. Strangely, an end to the conflict is bearish gold, even though the start of the conflict was not bullish.

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Calendar

CPI at the center of next week’s calendar, with some other tidbits like Norway CPI and UK GDP. Overall, a fairly tame week, calendar-wise. But it’s not really about macroeconomic data right now anyway.

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Final Thoughts

1. BTC perfect touch and rejection of $74,000. Pretty much right to the dollar.
2. US jobs were strong last month and weak this month. The truth is in the middle.
3. These numbers are frighteningly high. https://polymarket.com/event/us-forces-enter-iran-by

Have a spooky weekend.

There is something weirdly compelling about photos of abandoned mini-golf courses.

https://www.abandonedamerica.us/

good luck ⇅ be nimble