The US, Iran and markets | USAEMALL.com

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Good morning. There is only one story in markets, and the broader world, today. The range of possible market consequences is hard to quantify. Everything depends on what happens next on the battlefield — not our area of expertise, and we won’t hazard a guess. But we lay out some context and a few possibilities below. If you have insights, email us: [email protected]. 

The US strikes Iran

President Donald Trump claims that the US bombings of three Iranian nuclear facilities over the weekend “completely and totally obliterated” them, and Iran’s ability to create a nuclear weapon. Whether that is true is unclear. What is clear is that the fallout is unpredictable.

What happens next is up to the regime in Tehran — a regime that is considerably weaker today than it was just a few months ago. Its closest ally in the region, the Assad regime in Syria, is gone, and its strongest proxies, Hizbollah and Hamas, are in disarray. It’s own military is weakened, too, after a week of Israeli strikes. Iran’s regime, suddenly, has little to lose. 

For markets — far from the most important part of all this, but Unhedged’s territory — the risks are coming into sharper view. The most benign scenario is that Trump has bet correctly: Iran’s regime now backs off, and reaches a negotiated settlement with the US and Israel. 

Another scenario is that, instead of directly retaliating against the US or Israel, Iran closes the Strait of Hormuz, the waterway that carries 20 per cent of the world’s oil consumption on any given day. Last week, the big intraday jumps we saw were markets entertaining that scenario; today, it is starting to look like a possibility. Should the strait close, a jump in the oil price would certainly follow. As of Sunday night the market is pricing in just a taste of this — WTI futures jumped from $74 per barrel to $77 at the open on Sunday night while Brent crude rose above $80 per barrel, but both have pared back since. If the Strait stays shut for an extended period, and oil prices rise even higher and stay there, global growth will slow more than is already forecast; inflation will pick up; and the Fed may back away from making any rate cuts this year. Stocks would likely fall a bit, too. S&P 500 index futures edged down Sunday night, and major Asian market indices like the Hang Seng index and the Kospi index fell, but only by a little. How deep and how long the pain will be felt will depend both on what Iran does, and how the world responds in turn.

The final, bleakest scenario is further escalation that pulls the US into sustained war. Iran could target US military bases and assets in the region. But even that might not be a seismic market event, especially if it does not stifle global oil flows. Markets actually rose when the US attacked Afghanistan in 2001, though that rise was part of a broader post-9/11 recovery:

Markets rose leading up to the US invasion of Iraq in 2003, after a string of threats from President George W Bush, and went sideways after:

And the market rose when the US took action in Libya in 2011:

These incidents can only teach us so much. The economic and political context was different in each case. And of the three countries, only Iraq exports more oil than Iran, and none have the same influence over crucial shipping lanes. 

Even if there is no direct impact on oil flows or the profits of large global companies, a war would have implications for the Treasury market. The US deficit is already on an ugly trajectory, and markets have not taken to Trump’s Big Beautiful Bill. If the US shifts to a war footing, that budget may have to expand further. That would start a complex dance between the US Congress, the White House, the market, and the Fed. Congress and the market could push back against more spending, or Trump could try to pressure the Fed to suppress yields to clear the way for more borrowing. There are too many possible outcomes to predict. But we should all be aware that Treasury yields could rise from here. Benchmark 10-year Treasury future prices fell a little on Sunday night. Concerns over the budget? It’s too soon to tell. And the story will take weeks and months to play out.

We pray for peace — not for the sake of markets, but for the sake of the people caught in the crossfire.

(Reiter)

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