War in Iran enters its second month – hopes for a swift end
The decision is between:
firstly, further military escalation, such as the targeted deployment of ground troops, the (attempted) military securing of the Strait of Hormuz, or the destruction of Iranian energy infrastructure;
or secondly, accepting what has been achieved so far and ending the war – either through a negotiated settlement with Iran or unilaterally.
Considering that Iran has, until recently, been militarily capable of targeting specific sites in neighboring states, the first option would likely result in widespread destruction of the region's energy infrastructure and significantly exacerbate both the scale and duration of the energy price shock (potentially leading to a global economic downturn). Such a scenario would greatly amplify the market trends observed in recent weeks (with higher oil prices and declining stock markets).
The second option, however, would leave many questions about future political developments in the Middle East unanswered, but it would end a highly unpopular war in the US for the time being and would at least not completely undermine the US Republicans' chances in the November parliamentary elections.
Our base scenario therefore remains unchanged in its assumption that Trump – as recently reiterated – will end the war in the coming weeks, especially if the political pressure from high oil prices (particularly high US gasoline prices) and a declining (US) stock market becomes sufficiently intense.
Ending hostilities is the first step towards a more sustained recovery in the financial markets. Even more crucial would be the resumption of energy exports via the Strait of Hormuz, as energy prices – and consequently the global economy – depend on this. Reopening the Strait of Hormuz would be very positive for the stock markets. Although the real-economy consequences of the energy price shock would continue to affect us for many months, the financial markets price in future expectations – and these would improve significantly as a result.
Until then, political risks unfortunately remain above average, with contradictory news in the short term and a correspondingly high risk of short-term price fluctuations in both directions.