The three-phase framework remains intact, but the strait standoff intensifies short-term risks

Market Brief: Mini-war, negotiations, and international mediation proceed simultaneously; framework established; US-Iran minor actions test the limits

Middle East conflict update: The US Navy attempts to open the Strait of Hormuz, triggering ceasefire alarms

On May 4 Eastern Time, US President Trump announced the launch of 'Project Freedom,' dispatching the US Navy to escort neutral merchant ships stranded in the strait to safety. The aim is to restore freedom of navigation and ease global energy pressures. During the operation, brief military standoffs and skirmishes occurred within the strait; the US stated that it successfully guided some merchant ships through. Multiple ship explosions and fires were also reported, including a blaze at an Emirati oil port and an explosion on a merchant ship operated by a South Korean company near the strait, causing tensions to escalate rapidly.

Short-term outlook: The three-phase framework remains intact, but the strait standoff intensifies short-term risks

Iran recently proposed a three-phase negotiation framework through intermediaries, indicating that communication channels have not been completely severed. This framework follows the sequence of 'ceasefire first, then the strait, and finally nuclear issues,' but the Trump administration remains reserved about the order and specific content, believing there is room for improvement.

Meanwhile, the US 'Project Freedom' triggered a brief military standoff in the Hormuz Strait. Although Trump did not explicitly state whether this action violated the ceasefire agreement, the escalating tension highlighted the direct collision between the US's determination to restore freedom of navigation and Iran’s control over the strait. While Iran struggles to inflict significant damage on the US military, signs of regional conflict spillover have emerged, further testing shipping safety and escort effectiveness. In terms of market reaction, Asian trading this morning (May 5) showed cautious behavior overall, with limited stock market declines and no apparent panic selling, suggesting investors have already anticipated the latest developments and are adopting a wait-and-see approach. The market is currently in a phase where 'some risks have been priced in, and subsequent developments are being validated.' It will be crucial to closely monitor if both parties can continue communicating through available channels during the extended ceasefire period amid conflicts. If mutual trust continues to deteriorate, localized risks may still rise.

Long-term outlook: Negotiation framework emerges, but core differences remain unresolved, focus shifts to economics and policy

Iran’s proposal of a three-phase negotiation framework indicates a possibility for long-term peace, but disagreements persist over core interests such as retaining nuclear capabilities and control over the Hormuz Strait. Achieving a comprehensive and balanced agreement will require prolonged rounds of negotiations and rebuilding trust.

Compared to minor skirmishes at this stage (which Trump once called a 'mini-war'), more importantly, market attention is gradually shifting from 'negotiation progress' to the actual impact of post-conflict economic data. Whether oil prices stabilize, production-side impacts (PPI) on the consumer side (CPI) remain controllable, and the lag time of transmission will directly influence the Federal Reserve’s future monetary policy path.

Overall, the brief conflict between the US and Iran following the ceasefire failed to break the strait blockade, while negotiations remain deadlocked. If the blockade persists for too long, it would hinder post-conflict reconstruction and regional stability, amplifying medium- to long-term economic and policy uncertainties.

Additionally, US President Trump is expected to visit China on May 14-15 to hold talks with ** **. The stabilization and reopening of the Hormuz Strait could be one of the key topics of discussion between the two leaders.

Investment perspective: Leverage short-term bond advantages, focus on the long term, and establish a stable allocation

In light of the rapidly changing situation in the Middle East, investors should maintain a long-term strategic asset allocation mindset while appropriately seizing opportunities brought by short-term market volatility. However, they should avoid excessively chasing or betting on the outcome of a single event, focusing instead on steady positioning.

Additionally, the Senate Banking Committee passed Kevin Warsh's nomination as Federal Reserve Chair on April 29. Given that the Republican Party holds a slight majority in the Senate, he is expected to be confirmed by the full Senate before the current chair’s term ends on May 15. The new chair’s policy direction is anticipated to focus on three key priorities: 1) Re-evaluating inflation metrics; 2) Reducing excessive forward guidance and adopting a 'less is more' communication style; 3) Gradually restructuring the Fed's balance sheet, emphasizing the need for tapering but proceeding at a slow pace. Considering both the geopolitical risks in the Middle East and uncertainties around the new Fed chair’s communication style, we recommend investors continue to use short-term bonds as their core hedging position—effectively managing interest rate fluctuations and geopolitical risks while maintaining relatively stable returns as a buffer and foundation for overall asset allocation and long-term positioning.

Data source: Taikang Asset Management (Hong Kong), compiled on May 1, 2026.

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