Key Takeaways
- At the weekend the US and Israel began major combat operations against Iran. Unlike June 2025’s attacks, however, the operation is designed to bring about regime change.
- Markets remain relatively calm with modest downward moves. A de facto closure of the Strait of Hormuz has seen the oil price rise around 7% (at the time of writing).
- A prolonged closure could see oil prices trend higher, but in the near-term OPEC has committed to increasing production and stockpiles can alleviate short-term impacts.
- From a geopolitical perspective there are many unknowns. The US is showing no desire for “boots on the ground”, and any collapse of the Iranian regime would pose risks in terms of succession.
- For now, markets are relatively calm as they wait for greater clarity to unfold. Underlying fundamentals – both in terms of corporate earnings and economic growth – remain benign.
This week we focus on the weekend’s events after the US and Israel began major combat operations against Iran. Already this has gone way beyond what we witnessed in June 2025 with the US clearly now seeking regime change. Back in June last year the US was specifically targeting Iran’s nuclear facilities; this time round it goes way beyond that. The US and Israel are attacking a range of military sites and clearly targeting the Iranian leadership with the killing of the Supreme Leader and others.
Operation Epic Fury – as named by the US – began 10 days after President Trump gave Iran a maximum of 15 days to agree a nuclear deal. Talks were held last week and there was said have been some progress made. Clearly, however, Trump’s patience ran out ahead of that deadline. So far this morning financial markets are relatively calm with futures down 1%-2% and the oil price – the major conduit for market moves – opening about 12% up. At the time of recording, it is up about 7%, taking us to levels we saw during the 12-day war last June – about $80 a barrel. It is worth noting, however, that it remains below the average price over the past five years.
The key risk for financial markets and the wider global economy is the closure of the Strait of Hormuz, through which about 20% of global crude and refined oil supplies travel. It is also a transit route for liquefied natural gas (again with about 20% of global supplies passing through the strait). The passage has never been officially closed before, and Iran stated this morning that it is not “closed”, but shipping has been told not to transit the Strait. Three ships have been attacked, so it looks like a de facto closure for now – not least given that shipping insurance has been revoked. The result is that there are lots of ships at anchor waiting to see what happens next.
A prolonged closure and/or a strike at facilities and terminals in the region could see the oil price closing in on $100 a barrel. It could even push higher, which would have a significant economic impact. There are alternative pipelines in the region, and these will likely help soften the impact of supply disruption. OPEC have promised to increase production, and the use of significant stockpiles can alleviate short-term impacts. In terms of sustained higher oil prices, it is likely that Asia would be impacted most given that the bulk of the oil passing through the Strait is destined for the region.
In terms of geopolitics, there are many unknowns – not least the duration of this conflict and the scope and willingness of the US and Israel in terms of how far they will go to pursue regime change without “boots on the ground”. For the moment there doesn’t seem to be the desire or resources for anything beyond airborne strikes. Iran, meanwhile, is not sticking to the limited retaliation doctrine of the recent past. With no credible opposition in place there are risks that if the US and Israel are successful in taking down the regime, we could see a situation like that in Iraq and in Libya where anarchy ensued in the lack of a credible successor government.
Trump is likely to seek a swift resolution – he has already talked about having dialogue with the new Iranian leadership – but Iran has so far pushed back on talks. Trump currently has no mandate from Congress for this conflict, nor from the American people for a prolonged intervention. With midterm elections looming in November, the President will be mindful of any negative impact with US voters.
For the moment financial markets are relatively calm and waiting and seeing how this unfolds. It is not the time for dramatic portfolio moves and we need to wait and see what happens next. Risk appetite has held up very well in the face of recent challenges, and we should be mindful that history indicates that geopolitical shocks can move markets, but economic fundamentals will need to change for prolonged impact. Much of the time financial markets are quite adept at “looking through” geopolitical dramas. Fundamentals remain benign, whether it is corporate earnings or economic growth. As a result, markets have been resilient, but we will need to be mindful of how events pan out over the coming days and weeks.