It has now been ten days since we awoke to news that Israel and the United States had launched large, coordinated air and missile strikes across Iran.
While the lead-up to the strike is now a faded memory for most, it followed months of on-again, off-again, negotiations between the US and Iran over Iran’s denuclearisation. The talks repeatedly stalled around the main issue: the US insisting on a full denuclearisation and Iran’s refusal to accept it.
As negotiations broke down, US and Israeli military forces raised their readiness across the Middle East, triggering volatility in energy markets – particularly oil. Based on news at hand, it appeared the Israeli’s were eager to launch a pre-emptive attack (given critical intel they had obtained) which effectively compelled the US to join their ally in the offensive, a decision later confirmed by the US Secretary of State. The initial wave of strikes targeted Iranian military bases, air-defence systems, command facilities, and government compounds and resulted in the deaths of several Iranian leaders. Iran retaliated by striking Israeli territory and US defence bases through the Middle East, drawing other Middle East countries into the conflict.
Escalation points since the initial attack have seen the closure of the main shipping lane through the Strait of Hormuz, resumed fighting in southern Lebanon between Israel and Hezbollah, continued strikes inside Iran with subsequent retaliation on US bases and US/Israeli military assets across the region. Civilian casualties continue to rise.
Information continues to be fluid, and many outcomes could potentially eventuate. However, there are three main paths moving forward:
Early on, markets largely exhibited nonchalance to the conflict – the same behavioural traits the market exhibited in the two most recent conflicts. Price action was centered in rising oil prices on supply concerns, whilst commodity prices also saw some positive action. Equity markets saw some weakness but largely around the edges with investors seeking out more defensive names/sectors, government bond yields rose (prices lower) which was rather odd, whilst currencies largely reacted as expected with investors seeking out safe havens.
The escalation point for markets largely came in the last few days of trading as investors focused on the repercussions of an extended closure of the Strait of Hormuz while concerns grew with the Trump administration’s poor responses regarding plans for a resolution/end to the conflict. Interestingly, the Strait of Hormuz isn’t physically blocked but rather closed for insurance-related and safety reasons.
Regarding the Strait of Hormuz, some key facts to understand:
Markets are increasingly concerned of an elongated conflict with severe and significant disruptions to global oil supply. Oil prices had risen into the US$60 range leading up to the initial strike, rose above US$70 on the strike and spiked above US$110. They have since settled below US$90 a barrel at the time of writing.
What we’re watching
Obviously, there’s plenty of moving parts, so much so that even this piece is at risk of being stale as it is being written! Outside of the broadening of the conflict to a more regional setting, and the potential involvement of other actors, we are watching the following more closely:
PSK portfolios are well positioned to withstand many of the concerns noted above and we stand ready and willing to act depending on how things evolve from here. Our outlook for the year prior to this conflict was less cautious than we were 1-2 years ago, and that undercurrent remains, though is somewhat complicated by the evolving conflict which we continue to watch closely, and hope comes to a swift end.
We will keep you informed if anything of significance changes.
As always, if you have any questions or your personal circumstances have changed please do not hesitate to contact your financial adviser.
General Advice Warning - Any advice included in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on the advice, you should consider whether it's appropriate to you, in light of your objectives, financial situation or needs.
