Conflict brings volatility
The most crucial event of the past week, from the perspective of both the investment markets and global politics, is naturally the military operations that began in the Middle East over the weekend. At present, there is naturally a great deal of uncertainty in the air, and it is very difficult to assess how events will unfold over the coming days and weeks.
This content has been produced by Kvarn Capital Oy, a licensed crypto-asset service provider supervised by the Finnish Financial Supervisory Authority. This content is intended for informational purposes only and should not be interpreted as investment advice or recommendation. All investing in crypto-assets involves significant risks, and past performance is not a guarantee of future returns. Crypto-assets are not covered by investor compensation schemes or deposit guarantee schemes.
Key points
- The War in the Middle East is Shaking European Stock Markets
- Metals and the Mining Sector Continue to Look Strong
- Bitcoin Surpasses $71,000, Are We Seeing a Breakout?
Quick Recap: Last Week
Last week, the Kvarn Pulse newsletter was written just before the military operations broke out in the Middle East over the weekend. At that time, we summarized our analysis into three points:
- The S&P 500 index's sideways movement continues
- New record highs in the mining sector, is a new phase of the metal trade beginning?
- A bounce in the crypto market, is there already a reversal in the trend?
US Stock Market Stable, Declines Elsewhere
The most crucial event of the past week, from the perspective of both the investment markets and global politics, is naturally the military operations that began in the Middle East over the weekend.
At present, there is naturally a great deal of uncertainty in the air, and it is very difficult to assess how events will unfold over the coming days and weeks.
In the US stock market, the reaction to the onset of military operations has so far been quite moderate. The S&P 500 index dipped to around 6,700 points during Tuesday but recovered quickly and returned to the familiar trading range of 6,800 to 7,000 points seen in recent months.
Elsewhere in the world, the reactions have been stronger. The European STOXX 600 index came down a total of about five percent during Monday and Tuesday.
A drop of the same magnitude has also been seen in emerging markets.
What Should We Make of This?
At this stage, our primary interpretation is that the events of recent days look merely like a sharp "mean reversion."
During the early part of 2026, the US stock market has clearly underperformed compared to the rest of the world, whereas stock markets outside the US have been in a fairly strong uptrend.
In recent days, however, the hitherto weak US stock market has remained relatively resilient, while stock indices elsewhere in the world have slumped significantly more.
If we plot the prices of the iShares Core MSCI USA UCITS ETF, representing the US, against the Xtrackers MSCI World ex USA UCITS ETF, representing other developed markets, we can see how this ratio has been in a steep decline in recent months, and how we have seen a sharp mean reversion in recent days.
It appears that in the midst of the crisis, investors are once again preferring the US dollar and the US stock market. This is a development whose potential continuation is worth keeping an eye on, particularly in the event that the crisis in the Middle East is prolonged.
From a technical analysis perspective, both the European stock market and emerging markets look quite interesting. Both have dropped to around their upward-trending 50-day moving averages while at the same time remaining above the levels from which the strong upward move began in January.
Right now, we see more characteristics of a buying opportunity than a selling opportunity in this situation. The stock markets of both Europe and emerging markets have been in a strong uptrend, which is reflected in prices running far ahead of their 50-day moving averages.
Some sort of a correction was to be expected, and the geopolitical crisis has provided the necessary catalyst for it. If the price drop stops here and we do not see a decline below the levels seen at the beginning of the year, the current situation primarily looks like a quite promising buying opportunity.
Among individual sectors, the clear winner of the ongoing crisis is the energy sector. While other sectors have slumped, the iShares S&P 500 Energy Sector UCITS ETF has been forging new record highs in recent days.
The increase in geopolitical instability has also provided a tailwind for the defense sector. The price of the VanEck Defense ETF has risen by about five percent during the early part of the week.
Metal Trade Still Intact
Last week, before the military operations in the Middle East began, we titled our Kvarn Pulse newsletter "Metal Trade, Part 3?". Our hypothesis was that the prices of metals and the stocks of the companies producing them, which have been in a strong uptrend over the past year, might be moving into their next upward phase.
A week later, this hypothesis remains valid. The share prices of mining companies dipped slightly during Tuesday's general "sell-off" mood, but for example, the price of the VanEck Global Mining UCITS ETF is still in a clear upward trend, staying above the peak readings seen in January.
The price of gold has also remained in a clear upward trend.
So far, it seems that the metal trade we anticipated is still intact. Most recently, aluminum appears to be joining the metal trade, as the price of the WisdomTree Aluminium ETF rose to its highest levels since 2022.
Crypto Market Ready to Rally?
With the stock markets in a rather risk-averse mood in recent days, we have seen quite interesting signals in the cryptocurrency markets.
Contrary to the most obvious expectations, the price of the largest cryptocurrency, Bitcoin, did not make new lows when the military operations in the Middle East began, but rather traced a slight "higher low" over the weekend.
Following this, on Wednesday morning, we have seen Bitcoin's price rise right to the upper end of its trading range of recent weeks, to around $71,500.
These are quite interesting signals. Should we see Bitcoin's price rise above $72,000, the situation would start to look like an outright "breakout" and would lead us to expect further upward movement.
We are following this development with interest. However, we want to make it clear that it is not yet time to jump to conclusions. The upper edge of a "range" is fundamentally a place to sell, not to buy. We would like to see the price truly rise above $72,000 before the situation starts to look like anything other than noise within the range.
To manage expectations, we also want to remind that Bitcoin is currently in an unequivocal bear market, far below its 50-day and 200-day moving averages.
Phenomena typical of a bear market include sharp "bear market rallies", where the price rapidly rises between the downward-trending 50-day and 200-day moving averages. Once elevated there, the price rise often hits a brick wall, and turns sharply back into a downtrend.
In the 2022 bear market, we saw several prime examples of such "bear rallies.
Even if Bitcoin's price were to rise above $72,000 in the coming days, we believe it is justified to keep the baseline assumption for now that this would merely be a "bear market rally" following the severe price drops of recent months, rather than a new bull market.
This does not mean that an investor could not choose to join such an upward move, but it is good to be aware that there is a concrete risk of a sudden end to the rally, which one should be prepared to react to.
What would give reason to change this interpretation and expect an outright new bull market?
We set the milestone around the $97,000 mark. The previous "bear market rally" in January stalled at these levels. This is also the area where the 200-day moving average currently resides. After crossing this level, it would be difficult to consider the rise as just a bear rally; instead, it would look like a genuine new bull market.
From an investor's perspective, the dilemma naturally is that this relatively reliable signal of a market reversal only comes after a rise of about 35 percent. This is typical after severe sudden drops and is simply part of the uncertainty that an investor must manage within the framework of their own personal risk tolerance.
As a rule of thumb, we therefore offer the interpretation that Bitcoin's price:
- below $72,000 looks like an unequivocal continuation of the bear market
- between $72,000 and $97,000 looks primarily like a "bear market rally"
- above $97,000 looks like an unequivocal new bull market
Conclusion
We began this Kvarn Pulse newsletter by noting that the military operations in the Middle East have caused significant uncertainty in the investment markets, and we concluded it by pondering the criteria for a new "bull run" in the crypto market.
This breadth of thought well reflects just how wide the spectrum of various possible outcomes in the investment markets is right now. At this very moment, the focus is on the development of the crisis in the Middle East and its potential broader geopolitical repercussions.
Whatever happens in the markets, we will continue to monitor the situation and keep you up to date, so stay tuned!
The information and sources presented are for illustrative purposes only. While obtained from sources deemed reliable, their accuracy cannot be guaranteed.