Where is this war going to lead us?

We are facing a new episode in the war that began two and a half years ago against Israel, initiated by Hamas terrorists and backed by Iran. Is a financial storm brewing?

The origin of everything (at least the most recent one)

The Iranian government’s hatred of Israel and the Jewish people is longstanding. Now we are witnessing a new episode in the war that began two and a half years ago against Israel, initiated by Hamas terrorists and backed by Iran. Following that event, Israel acted decisively, targeting  Hamas in Gaza  and then  Hezbollah in Lebanon.

Iran ‘s continued role  as a destabilizing force  on the international stage and the nuclear threat posed by its military development have led the United States, along with Israel, to become directly involved in trying to overthrow the regime of the ayatollahs and thus restore stability to a country internally divided and mired in a serious internal economic and political crisis.

Let’s not forget that Iran is a country that has supported Russia’s war in Ukraine, that it is a  strategic supplier to China  since its exported crude oil is sold mainly to that country, and that, in addition to declaring war on Israel in 2023, it has been financing and training all kinds of regimes, terrorist groups, and paramilitary forces.

In this context, the United States has deployed its large aircraft carriers to the area in what is, more than a military operation, a  major intelligence operation  that has rapidly decapitated the Iranian ruling elite.

However, as President Trump has already pointed out on several occasions, the only way to  overthrow this regime is from within with a popular uprising , thus referring to the popular rebellion already attempted a few months ago and crushed by Iranian repressive forces with tens of thousands of civilian deaths.

What to expect now in the markets

In the short term, Iranian political and religious leaders will seek the succession of the supreme leader (Iran is the  only remaining theocracy  in the world, that is, it is governed by someone appointed directly by God), and will try to reorganize their deteriorated military force, due to the US/Israeli attack, as well as defend their economic interests focused especially on  crude oil exports.

Regarding this, in the coming days, as happened yesterday, Monday, we will witness  significant financial effects  on the price of oil (rises) and on risk assets in general (falls). As for the former, geopolitical tensions in the region will intensify, and Iranian forces will attempt  to block traffic through the Strait of Hormuz in the Persian Gulf, a narrow waterway through which approximately 20% of the world’s oil passes. A  rise in crude oil prices is certain  in the short term, as occurred yesterday, given that the geopolitical risk premium is soaring. Then, we shall see.

And we will see why closing the Strait of Hormuz  would harm the Iranian economy  and the flow of oil to China—with the consequent displeasure of that country—more than it would harm oil consumption in the US and Europe. Furthermore, China is estimated to currently have record levels of crude oil reserves, and OPEC has idle production that could be quickly brought into the market. Finally, we must consider the  compensatory capacity of other producing countries  (Saudi Arabia, Kuwait, the United Arab Emirates, the United States, Canada, Latin America, and North Africa), with sufficient production and the willingness to increase supply to mitigate any shortfall caused by the crisis in Iran.

We will probably describe the reaction of the crude oil market as an overreaction in a few days  , but what is happening is within the realm of possibility given an event that affects the stability of an area with several of the world’s major oil producers located there.

Then there are the  stock markets . Yesterday was a volatile day, with Europe bearing the brunt of the losses and the US recovering somewhat thanks to a suggestion from an Iranian leader that talks with the US are possible. Trump would be open to this, as an excessive rise in oil prices would likely trigger  inflationary pressures, potentially reducing expectations of the US interest rate cuts  that Trump desires/is pushing for. Consequently,  bond prices  have fallen (yields have risen due to inflation fears).

In any case, the  pragmatism of the new Iranian leaders —the previous ones have been eliminated—and their willingness to accept compromise solutions with the US regarding respect for human rights in their own country and the continuity of their economic interests linked to oil exports, will determine the  speed of a solution  to this conflict.

To conclude this overview, it’s worth noting that, inevitably, in this context, gold is once again acting as a safe haven. However, caution is advised against short-term speculation, as a stabilization of the situation with a halt to hostilities would likely lead to a sharp decline in its price.

Hopeful conclusion

To deal with these risks and this nervous situation, as investors we must  remain calm : this is  the best attitude when events move faster than market fundamentals  , and we should try to  take advantage of any exaggerated market reactions  , distinguishing temporary disturbances from genuine long-term deteriorations.

In conclusion, accepting the prevailing uncertainty, my outlook is favorable since, on the one hand, we could see  the main destabilizing element  in the oil market and in the Middle East region (the regime of the ayatollahs of Iran) disappear and, on the other hand, witness an improvement in the quality of life of Iranians, which has been increasingly diminished in recent times.

We may be facing a  catalyst that accelerates a transformation in the region , reducing the geopolitical risk that is practically permanent in the area and improving the global economic environment, which  would end up being favorable for financial markets .

P.S. For decent people:  As I mentioned in a postscript to this column regarding Maduro’s fall, I believe we are now witnessing another example of the positive side of the histrionic Trump’s actions. Whether it’s due to the defense of freedom and human rights in Iran, or his inevitable desire for the limelight, now intensified by the  upcoming November midterm elections  , I find the Trump Administration’s actions against the Iranian tyranny more than commendable.