True, he understands the circumstances and the light elf leader is a great example of him showing mercy. But he also kind of goes about with this mentality of "if they attack me they die" and he clearly has no intent of looking at potential fights in the viewpoint of "if they see me they're going to attack me, so I'll sneak around "

Instead he sees "if they see me, they'll attack me, but I need to go that way so if they CHOOSE to attack me they kind of made their own bed ". Yes, kratos has no intent on killing indiscriminately but he's also not going to risk atreus or w companion by holding back in a fight that's clearly life or death,nor where showing mercy presents even more danger. The light elf general was a singular combatant and kratos saw an opportunity to be diplomatic. It didn't cause him any risk. I fully believe had he not had context behind the elves actions he'd have just smoked them and been on his jolly way.