There was a peculiar reaction in markets over the weekend to the major risk event. After the US confirmed that it had launched three airstrikes at Iranian nuclear facilities, oil crude Price naturally spiked higher. But, relatively quickly they came back down. Equity futures were in the red on the weekend, but stock markets broadly turned green after they opened. What’s going on?
The US airstrikes are of course a pivotal point in the Israel-Iran war. But, it seems markets are becoming more and more convinced that the conflict will remain contained. Whether that’s a correct assessment, only time will tell. But, it is a thought process that will likely drive not just the price of crude, but safe haven flows affecting forex as well.
How Much Was the Damage?
One of the key points is potentially the amount of damage done to the facilities. The US’ objectives were ostensibly to stop Iran’s ability to create a nuclear bomb. US President Donald Trump’s initial reaction was that the operation was a complete success, with the facilities being “obliterated”. But other comments ran the gamut from the more cautious Pentagon communique saying that the damage was still being evaluated, to Iranian officials claiming no damage had been done whatsoever.
Interestingly, there were reports that the nuclear material had just been evacuated the day before, with a line of trucks at the Fordow facility being seen on satellite imagery. If Iran retains its ability to create a nuclear weapon, this could potentially prompt the US to make further strikes to “finish the job”. Meanwhile, Israeli Prime Minister Benjamin Netenhayu said that after the US strikes, his country’s mission to destroy Iranian facilities was near to being over.
Where Do Things Go Now?
The potential for de-escalation exists now, assuming that Israel announces completing its attacks in the near future. Iran had previously said it would stop retaliatory strikes on Israel if it was no longer being attacked. Tensions would obviously persist, and the markets might remain on edge until enough time goes by to be sure the situation has resolved.
But potential for rapid escalation is clearly a concern. Iran has ramped up the rhetoric about responding to the US, even reportedly threatening to activate “sleeper cell” terrorists in the US. The last major incident between the two countries was the killing of IRGC leader Kasem Soleimani back in Trump’s first term. Iran responded by launching missiles at a US base in Iraq with no deaths, and the situation was resolved after that. But, if Iran inflicts any major damage on US installations, then this could radically increase the temperature in the region as the US would likely conduct more airstrikes.
What About Oil Shipments?
Already on Sunday, Iran’s parliament approved a measure to close the Strait of Hormuz. But, such an action would have to be approved by the much more powerful national security council. About 20% of the world’s oil supply goes through the Strait. However, less than 5% of that goes to the US, while over 50% goes to Iran’s main customer: China. Closing the Strait might have global implications, but appears to not be a method that would likely seriously harm the US. As of Monday morning, ships were still transiting the Strait.
How the market might ultimately react lies, for the moment, with how Iran responds. As time goes on, the likelihood of an escalatory strike diminishes, which could give markets growing confidence. With OPEC+ increasing production next week, oil crude Price could revert lower. Commodity currencies could gain on the reversal of safe haven flows.