The calm after the storm or just a lull? Early Monday trading was surprisingly tranquil after the U.S. struck Iran’s nuclear infrastructure over the weekend, backing up Israel’s initial attacks on the country, but it
might be a logical reaction.
Tehran’s most powerful option to strike back would be to blockade the Strait of Hormuz—through which around 20% of the world’s oil flows—likely propelling crude prices above $100 a
barrel. However, such an action would be more damaging to Iran’s own economy and that of its biggest oil customer China, than to the U.S.
That calculation accounts for the muted reaction in oil markets and safe-haven assets such as gold. The market seemed to be betting both Washington and Tehran will step back from further escalation, disregarding President Donald Trump’s musings on potential “regime change” in Iran.
Still, there are plenty of unanswered questions—was Iran’s nuclear enrichment program truly obliterated? Will Israel step up its own actions? Could Iran opt for partial disruption of oil shipping rather than a full blockade?
That uncertainty could mean the Federal Reserve will hold out against pivoting to rate cuts as higher oil prices would drive inflation, despite pressure from the White House to lower interest rates. Fed Chair Jerome Powell will have to defend that stance in congressional testimony on Tuesday and Wednesday. The debate will also be influenced by Friday’s publication of the core PCE price index, the Fed’s favored inflation gauge, which is expected to rise 2.6% for May from the previous year.
The market has gotten used to shrugging off geopolitical tensions in the past couple of years. It’s a pattern that’s still holding and investors might be right to focus on concerns closer to home.
—Adam Clark
*** Join Barron’s senior managing editor Lauren R. Rublin and deputy editor Ben Levisohn today at noon when they talk with Keith Lerner, co-chief investment officer at Truist Advisory Services, about the outlook for financial markets, industry sectors, and individual stocks. Sign up here.
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CONTENT FROM: Columbia Threadneedle Investments
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Bonds reclaim role as a volatility buffer
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With markets in flux, fixed income is providing important diversification. We explore the key market drivers and how investors can navigate the evolving landscape.
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Iran Threatens Harsh Response to U.S. Strikes
Iran’s armed forces threatened a harsh and decisive response Monday, while the country’s foreign minister arrived in Moscow for talks with Russia President Vladimir Putin. It comes after President Donald Trump said U.S. strikes “obliterated” Iran’s nuclear sites.
- The Iranian army’s commander-in-chief Major General Amir Hatami told senior commanders in a videoconference that the U.S. strikes will be met with a harsh response, the country’s Tasnim News Agency reported. Tehran reserves the right to resort to its own options in reaction, it added.
- Iran’s Foreign Minister Abbas Araghchi arrived in Moscow Monday to meet with Russian officials and consult with Putin on how to proceed, The Wall Street
Journal reported.
- Trump took to social media overnight to say satellite images confirmed the success of the U.S. strikes. “Monumental Damage was done to all Nuclear sites,” Trump wrote in a post on Truth Social. “Obliteration is an accurate term!”
- The United
Nations’ atomic energy chief Rafael Grossi said the strikes on Iran’s underground Fordow enrichment site are expected to have caused “very significant damage,” the Journal reported.
What’s Next: While the world
awaits Iran’s response, Israel may be looking to end the war soon, Israeli and Arab officials said, according to the Journal. It remains to be seen whether the conflict will end through diplomacy or more military aggression.
—Callum Keown
3 Scenarios for Where the Iran War Goes From Here
There are three broad paths forward after the U.S.’s decision to join Israel’s war on Iran. Iran admitting defeat, implicitly or explicitly, would calm pressure on oil prices and allow stocks to continue their rally.
An escalation could do the reverse. And the effects of regime change are difficult to predict.
- The U.S. attack was calibrated to allow Iran to admit defeat after an Israeli campaign of assassinations and other effects to degrade the Iranian regime. Washington signaled its only intent was to eliminate the threat of an
Iranian nuclear weapon. The next steps are up to Iran.
- The Iranian regime may carry out its many threats. Some prominent analysts believe Iran’s theocratic leaders will feel compelled to do so. “I don’t see a scenario in which they would not respond, because that would mean accepting unconditional surrender,” Vali Nasr, an Iran expert at Johns Hopkins, told CNN.
- The most damaging would be attempting to mine the Strait of Hormuz or shutting down the waterway. Iranian lawmakers publicly discussed the latter option on Sunday, saying the Parliament had voted for such a move. Oil prices could exceed $100 a barrel with those sorts of disruptions.
- Iran has a stockpile of enriched uranium that could be used to make a crude nuclear weapon. The stockpile’s whereabouts are unknown, Rafael Grossi, head of the watchdog organization the International Atomic Energy Agency, said on Sunday. That could trigger a flight to safety out of stocks and into Treasuries and gold.
What’s Next: Iran’s Ayatollah Ali Khamenei, is 86. He has spent heavily on building a now ruined nuclear program, and the Iranian economy is weak with widespread discontent. A coup could see Iran’s military leadership take charge, or that leadership could fall in the face of a popular uprising.
—Matt Peterson
These Are the Bombers and Military Craft Behind Saturday’s Strikes
The Operation Midnight Hammer strikes on Iran’s nuclear program were a feat
of coordination, involving more than 125 U.S. aircraft, including fourth and fifth-generation fighter jets, B-2 stealth bombers, refueling tankers, reconnaissance aircraft, and the submarine that launched more than two dozen Tomahawk cruise missiles. Here’s more about them:
- The U.S. entered the battle after Israel attacked Iran on June 13, targeting its nuclear facilities in an attempt to keep the country from developing atomic weapons. Saturday night, U.S. operations targeted three of Iran’s nuclear sites—Fordo, Natanz, and Isfahan—severely damaging them, the Pentagon said.
- Northrop Grumman’s B-2 bombers left for the mission from Missouri and refueled midair multiple times on the way. Entering service in the 1990s, the B-2 resulted from years of stealth technology research and innovation. It is the only long-range penetrating stealth bomber in the U.S. arsenal.
- The B-2 bombers dropped 14 bunker-busting bombs on the Iranian facilities, the first operational use of the 30,000-pound weapon that the U.S. Air Force ordered from Boeing. Northrop’s B-21 bombers will eventually replace the B-2s.
