Iran

We outline a framework for the Iran war's impact on the commodity outlook in the event of a prolonged Strait of Hormuz disruption. We break it down into three phases: (1) the Initial Shockwave, (2) the Ripple Effects, and (3) the Backwash. The first phase has largely passed, and we are now in the Ripple Effects phase.

Investors are too complacent on the closure of the Strait of Hormuz. Upgrade cash and downgrade equities, both to neutral. 

The conflict in the Middle East persists as the US and Israel keep striking at Iranian military and internal security sites, and Iran has responded with its own missiles and drones against the Gulf States. Although the pace of Iranian retaliation has declined, it appears to have stabilized, as evidenced by attacks against the UAE.

The conflict in Iran has entered the “post-Trump taco zone” where it is now all about Tehran’s reaction function. 

Regional geopolitical risk is rising for Europe, EM Asia, and South Asia. We adjust our regional risk matrix accordingly. 

The spike in oil and gas prices has raised the odds of a global economic downturn. Combined with a more negative signal from our MacroQuant model, this warrants tactically downgrading stocks from neutral to underweight. Looking further ahead, the Iran war will lead to bigger defense budgets and a greater focus on energy self-sufficiency.

The Iran war remains a terms-of-trade shock rather than a classic flight to safety – for now. As oil risks skew higher, policy repricing and growth differentials should continue to favor a tactical rebound in the USD.