Is it time to sell crude oil? Bank of America's Hartnett: For Trump to win the midterm election, the US-Iran war must be "de-escalated" by March

Bank of America Chief Investment Strategist Michael Hartnett highlighted in his latest Flow Show report that domestic political pressure in the United States will force the Iran war to ease in March. If the situation de-escalates, oil and USD should be sold, 30-year US Treasuries should be bought, and risk assets are expected to bottom out and rebound in March.

Currently, US oil prices have surged 45% and gasoline prices have risen 15%, pushing Trump’s economic approval rating down to 40% and inflation approval to a low of 36%. Hartnett believes the Iran conflict is politically unsustainable and Trump must reverse the situation before the midterms, which means there will be a window for de-escalation in March.

Once the situation cools, Hartnett provides a clear trading guide: sell oil at $90/barrel, sell USD when DXY exceeds 100, buy 30-year US Treasuries at a 5% yield, and expect risk assets to bottom in March.

At Monday’s opening, Brent crude oil briefly approached $120/barrel before pulling back, quoted at $107 at the time of writing.

At the same time, Hartnett mentioned that if the conflict escalates, the US will ensure oil supply and maintain AI technology dominance, so oil, USD, and US tech and defense industries will outperform; oil-importing countries such as South Korea, Japan, and Europe will come under pressure, especially Japanese and European banking sectors, which will face significant drawdown risk.

Hartnett’s core logic is based on a pragmatic political assessment: the foundation of Trump’s governance is being directly eroded by rising oil prices. Trump’s support on economic issues has fallen to 40%, and on inflation to a notably lower 36%, returning to trough levels.

At the same time, oil prices in the US have risen 45% from pre-conflict levels, and retail gasoline prices are up 15%, with inflationary pressures transmitting directly to average voters.

In Hartnett’s view, this makes a protracted Iran conflict politically unsustainable. The real pressure from the midterms requires Trump to reverse this situation, and a recovery in his approval before the second quarter is a prerequisite for risk assets to gain upside.

Hartnett believes de-escalation in Iran will trigger the following trade logic: sell oil at $90/barrel, sell USD when DXY is above 100, buy 30-year US Treasuries at a 5% yield, and risk assets are likely to bottom in March.

Meanwhile, he emphasized that a "short war" would reignite the bull logic for inflation-benefiting assets: commodities and emerging market small caps will benefit as the USD bear market resumes.

However, Hartnett is cautious about a broad rebound. He points out that for a new equity market high to emerge, three conditions must be met: adequate buildup of short positions, a policy-level panic reversal, and a reversal of peak liquidity expectations.

At present, none of these three conditions have matured, and the S&P 500 has yet to see sufficient downside clearance (such as falling below 6600), while overall market positioning remains tilted towards longs.

Hartnett clearly outlined another path: if the Iran situation continues to escalate instead of easing, the asset allocation logic will undergo a fundamental reversal.

In this escalation scenario, the US would intervene fully to ensure oil supply and support the energy needs of AI infrastructure, with benefitting assets shifting to: oil, USD, US tech stocks and the global defense sector. The cost will be borne by oil importers such as South Korea, Japan, and Europe.

Hartnett especially points out that, in an escalation scenario, the greatest risk lies with Japanese and European bank stocks. Previously, these two markets were seen as the core beneficiaries in the current rally.

Among all variables, Hartnett places USD as the core asset most worthy of attention at present, defining the USD index (DXY) as "the best global liquidity barometer."

He believes that if DXY breaks above 100, it means the peak of the global central bank interest rate cut cycle has arrived. On January 1 of this year, markets had priced in a 100% chance of a Fed rate cut by June 17, but that probability has dropped to 37%. Additionally, a stronger USD would flatten the yield curve and potentially trigger an inflationary shock.

This framework suggests that USD trends are not only an FX signal, but also a core indicator for identifying the global liquidity inflection point, Fed policy direction, and whether risk assets can truly stabilize.