Israel-Iran Conflict: Initial Reactions and What I’m Watching

Israel’s military attack on Iran’s nuclear infrastructure and Iran’s subsequent missile fire response pose macroeconomic and market challenges to investors given the potential for wider regional conflict and the great-power (i.e., Russia, China, US) stresses that run through the region. It also represents the most serious foreign policy challenge of Trump 2.0 to date and adds new strains to today’s already highly destabilized geopolitical backdrop. Nevertheless, this action wasn’t unexpected. It has been a key component of my geopolitical analysis this year. Here are my first thoughts on potential geopolitical, national-security, and market implications and what I’m watching as I assess possible outcomes.

Risk of Escalation

It seems likely that the US and Western coalition partners, Gulf states, and even potentially countries such as China (who has economic interests in open shipping lanes) will do what they can to contain this conflict.

Be Wary of Misinformation

As investors consider their responses, my usual advice holds true: this is a fluid event, with information likely to be partial and in many cases incorrect. Because of the potential for deliberate misinformation, I urge investors to exercise caution.

Israel May Act Further

Given the existential threat Iran’s nuclear weapons program represents to the state of Israel and claims by Prime Minister Benjamin Netanyahu and other Israeli officials that Iran has taken extraordinary steps to weaponize enriched uranium (reportedly sufficient for 9-10 nuclear bombs), we should expect significant military operations by Israel. Importantly, as shown by the missile attacks in the days following the first attacks, we should also expect a robust military response from Iran.

Direct US Military Action May Be Unlikely

A key escalatory question remains: Will the US military become involved in defending Israel and, more significantly, will it participate in military operations? Some 40,000 US troops are stationed across the region. A primary US military objective will be “protecting American forces in the region,” as US Secretary of State Marco Rubio said in a statement following the attack. My base case is that President Donald Trump will likely refrain from direct military participation unless US assets are directly targeted.

Inflation: A Key Market Risk

The key risks from a market perspective are that a long and escalating conflict, combined with the high level of uncertainty of US tariffs, would add to inflation and other macro risks. The probability of this least-market-friendly outcome remains dependent on the course of military action from here.

What I’m Watching

In terms of assessing possible outcomes, I’m watching comments and responses by China, a significant purchaser of Iranian oil, and Russia, which remains a staunch ally of Tehran and beneficiary of Iranian drones, missiles, and other military technologies that Russian forces are deploying in Ukraine. These great-power stresses and competing strategic objectives are one of the reasons why a conflict of this nature is so potentially serious, particularly given the unstable situations in Ukraine, the Taiwan Strait, the South China Sea, on the Korean Peninsula, and elsewhere.

This event remains consistent with a recurring message about regime change: we’re at the end of a long geopolitical cycle and at the beginning of a new one. Our new reality includes increased fragmentation and less policy cohesion globally, as well as an increasing policymaker focus on national security over economic efficiency, both of which suggest the possibility of more conflict ahead. As highlighted repeatedly in my analysis, change represents both opportunity and risk for active investors. We will remain diligent in assessing both on our clients’ behalf as this conflict evolves.

Israel-Iran Conflict: Market Outcomes and Impact on Inflation

Financial markets responded on June 13 to overnight hostility between Israel and Iran, in which Israel launched missiles targeting Iranian nuclear and military facilities and Iran retaliated with drone attacks.

Oil prices initially rose 13% on the news but retraced approximately half that move within hours.

Potential Outcomes

Similar incidents in recent years have amounted to a limited exchange of missiles. Iran's response has typically been sufficient to demonstrate domestic strength without escalating tensions further.

Several Middle Eastern nations (including those which have already condemned the attacks, such as the United Arab Emirates and Saudi Arabia) have previously intervened to calm situations like this. Given its role in the oil market and the wider regional economy, Saudi Arabia wields considerable influence.

Israel has stated that the operation will continue for "as many days" as it takes to remove the Iranian threat. But hostilities could rapidly settle if Middle Eastern countries and, if to some extent, the US step in.

What Does This Mean for Oil?

The likelihood of Iran taking any action in the Strait of Hormuz, the often-touted disaster scenario for oil markets, appears very remote. Such action would impact flows for the other Middle Eastern nations who are aiming to mediate the situation, while inflicting little harm on Israel.

Israel could apply further pressure by striking Iranian oil infrastructure and disrupting the Iranian oil supply (which makes up 3.5% of global supply). However, Israel's stated aim has been to impede Iran's nuclear program, consistent with the fact that all strikes so far have targeted Iranian nuclear and military facilities. As such, disruption to oil production may well be limited.

Other dynamics in the market continue to point to a global market oil surplus continuing to build in the coming months.

Inflation Outlook

Although oil prices are sensitive to this type of conflict, as in previous events the initial price rise moderated in the following hours. If Brent Crude settled at $75 per barrel, it would imply that G7¹ energy inflation would be a little above 5% over the next year.

Would this lead to broader inflationary pressure? Probably not.

Previous research by our team suggests that every 10% rise in oil prices adds just 0.1% to core inflation.²