US-Israel strikes on Iran: What investors need to know

Over the weekend, the United States and Israel launched a coordinated military assault on Iran. Iran retaliated with missile and drone strikes on US military installations across the region. What could this emerging situation mean for markets? A core tenet to our view is that markets typically look past geopolitical events unless they materially alter economic fundamentals. To help determine what might come next, we offer four possible scenarios for what we could face in the coming weeks and explore the possible reaction of various asset classes.

What we know so far about the conflict

As we write this on Sunday, March 1, this is what we understand the current situation to be.

Early on Saturday morning, the United States and Israel launched a coordinated military assault on Iran. The scale of these strikes was larger than we’ve seen in the recent past, and Iranian state television has confirmed Supreme Leader Ayatollah Ali Khamenei was killed. Iran has retaliated with missile and drone strikes on US military installations across the region. Civilian areas have been hit in Dubai and Doha, but it is not clear whether these were targeted explicitly.

We have not seen any reports of oil facilities across the region being hit or disrupted at this point. Iranian media claims the Strait of Hormuz is effectively closed, though the state hasn’t issued an official blockade. A few ships have been attacked and the latest we have seen is that many are starting to drop anchor rather than travel through the Strait at this time.

What could happen next?

US President Donald Trump and Israeli Prime Minister Benjamin Netanyahu have stated they are pursuing regime change. This means it is not clear what would allow them to quickly declare victory and de-escalate. The situation remains incredibly fluid. The absence of well-defined objectives means the prospect of a prolonged campaign is heightened.

We believe the initial reaction in markets is likely to be risk-off, but it might not stay that way. The medium-term reaction will likely be guided by how the oil and — to a marginally lesser degree — gas markets move. That will be determined by whether oil and gas supplies are disrupted and to what degree.

In writing less than 48 hours since the first strikes, our assessment presently is that oil supplies are largely unaffected. That could change quickly. Indeed, it may not need physical restrictions, so long as markets believe such restrictions are possible.

Four potential scenarios for oil prices and markets

Though the situation is highly fluid and may change rapidly, we consider four broad scenarios. Here, we list them in order from the lowest to highest impact on oil prices and markets.

Scenario 1: Iran’s military capabilities are disrupted, but oil facilities are not. Ships continue to pass through the Strait of Hormuz.

Under this scenario there is a good chance oil prices could fall in the coming week or weeks. Oil prices had risen somewhat ahead of the US/Israel actions, and on March 1, OPEC+ announced a larger-than-expected production increase which could partially offset a disruption in supplies. Of course, this relies on them being able to get the oil out.

We give this scenario a subjective probability of 40%.

Scenario 2: Iranian oil facilities are disrupted.

In this scenario, we believe oil prices would move higher but in a relatively contained fashion. Iran supplies around 3% of global oil supplies¹ (after allowing for its own consumption), much of which heads to China. OPEC+ could perhaps step in and close any gap. We ascribe a low probability to these facilities or pipelines being targeted as Israel and the US have little incentive to drive oil prices higher through such action. President Trump’s approval rating and prospects in the mid-term elections could be damaged if oil and therefore gasoline prices rose significantly.

We give this scenario a subjective probability of 10%.

Scenario 3: Iran strikes oil and gas facilities in the region.

Iran has already made some symbolic strikes, but not yet on oil and gas facilities. These could be escalated and oil facilities in Saudi Arabia and others could be targeted. However, the Saudis have shown in the aftermath of past strikes that they can repair these facilities quickly. The scale of any strikes and ability to restart is the unknown now. Thus far it appears Iran has targeted mostly US bases but not oil facilities or transport yet.

We give this scenario a subjective probability of 20%.

Scenario 4: Iran or its proxies significantly restrict shipping through the Strait of Hormuz for a significant period. Global oil supplies fall.

The final scenario is the most worrisome. Iran and its proxies do not need to physically block the Strait, they can just increase the risk of transit enough to raise the cost for ships to move through — specifically, the costs of insuring a ship. Already, war insurers of vessels are reporting that premiums to cover ships in the region could rise by up to 50% in the coming days. 

A de facto partial blockade via the insurance market rather than a physical one caused the Red Sea effectively to close to much commercial traffic in late 2023/early 2024. The difference is that there were alternative routes to the Red Sea, around the Cape of Good Hope, but there is no alternative to the Strait of Hormuz. This is why watching the number of vessels moving here will be so critical to oil markets in the coming days. That said, a pipeline exists in the United Arab Emirates that could divert oil to ports that avoid the Strait of Hormuz.

We believe this would be the most damaging scenario, with the global supply of oil and liquefied natural gas (LNG) restricted. Asian countries are perhaps the most vulnerable, especially Japan and Singapore.

We give this scenario a subjective probability of 30%.

Anticipated market reaction

We anticipate the initial market reaction will very likely be one of a risk-off nature:

Equities

We expect equities to move lower in the immediate aftermath of these events, but the outlook thereafter hinges on how the situation unfolds. Most of the effect is likely to be felt through higher oil prices. In other words, we expect energy producers will fare better than energy consumers. Within equities, we believe cyclical and consumer sectors are likely to be hit hardest. Defense, major energy companies, and gold miners would likely be the obvious beneficiaries of this kind of geopolitical shock.

In terms of regional characteristics, European equities are structurally more exposed to energy price shocks than US markets, given higher energy intensity in industry and greater dependence on imported hydrocarbons. This also applies to Japan. Many emerging markets that rely on foreign energy sources are at risk, but energy-producing nations are likely to fare better. We also note that many Asian economies rely on imports from the Middle East, which may result in downward pressure on local assets.

Bonds

We think that bond yields could rise in the short term on concern about higher inflation, though falling real yields (on concern about economic growth) could dampen the effect. It is possible that some government bond markets could benefit from so-called “safe haven” demand, but we think inflation concerns would dominate. On that basis, and given the energy independence of the US, we suspect US Treasuries may be less impacted than European and Japanese government bonds. We would expect high yield bonds to suffer a widening of spreads, as economic concerns build.

The US dollar

Normally we’d expect the dollar to rally in an early risk-off scenario, and that may be the most likely outcome now. However, the so-called “safe haven” status of the USD has recently been put in question. We expect the currencies of energy-exporting nations to strengthen, including the Canadian dollar, Mexican peso, Norwegian krone and Middle East currencies (though the effect on the latter may be dampened by the proximity to conflict).

Energy

We expect prices to rise initially, reflecting elevated risks. But as we outlined above, there are a range of possibilities for how oil and gas prices evolve. We believe the most likely outcome is that Iran’s military capabilities are disrupted, but that its oil facilities are not and that the Strait of Hormuz remains open. This would suggest a relatively modest boost to energy prices in the medium-term, in our view.

Precious metals

We believe that gold and silver prices are likely to rise as markets digest a new wave of geopolitical uncertainty. Even if the Strait of Hormuz remains open, we anticipate precious metals to benefit from greater uncertainty.

What are we watching now?

As noted above, we are monitoring the situation, particularly around the Strait of Hormuz. Tanker movements, US Navy statements, and insurance market rates are likely to be key areas of interest in the coming days. Similarly, Saudi Aramco and Abu Dhabi National Oil Company communications on infrastructure status could allay or heighten market concerns, depending on how missile strikes evolve.

What does this mean for our core views?

There are historical analogies for what might happen, but they are imperfect now as this conflict is a more direct and escalatory confrontation. Still, they underscore a key market dynamic: Without physical infrastructure damage or durable Hormuz disruption, spikes in crude (and natural gas) have tended to fade as supply concerns proved transient. The key difference today is that Iran has already signalled and executed far wider retaliation than in any prior episode.

However, we emphasize that most actors here do not want to see a major oil supply shock that harms the US and global economy. These are troubling and very fluid events, but based on the information we have today, we haven’t materially changed our core views this weekend.