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Point of View · 06.13.25

What the Israel-Iran Conflict Means for Markets and Investors

We analyze the impact of the conflict across stock, bond and commodities markets and on our tactical outlook.

  • Equity Insights
  • Fixed Income Insights
  • Markets & Economy
  • Volatility & Risk

Key Points

What it is

We analyze how the conflict impacts equities, fixed income and commodities.

Why it matters

The conflict could broaden, potentially impacting oil prices and global economies.

Where it's going

The tragic events serve a reminder of the importance of diversification and cash liquidity.

What we know

 

Israel, unilaterally, launched 200 planes, targeting 100 sites including nuclear enrichment facilities, associated infrastructure, and key military and atomic personnel. Their mission is to stop Iran’s uranium enrichment program, which Israel calls a danger to their survival. There are reports of significant damage, several senior military figures including Major General Hossein Salami, head of the elite Revolutionary Guards, have been killed, as have several nuclear scientists.

 

Importantly, oil infrastructure was not targeted. It also appears the U.S. were also not involved in the strikes.

 

Israel is assessing damage before considering further action, with expectations operations could last a few more days. There’s no sign of radiation leakage. Iran has retaliated by launching 100 drones towards Israel, which most commentators believe will be intercepted by Israel defense systems. A state of emergency has been issued in Israel, schools are closed, airlines are grounded. Iran has pulled out of the sixth round of talks with the U.S/ which were scheduled for this Sunday in Oman.

 

 

Market response

 

Markets are risk off. As historically has been the case with Middle East conflicts, oil prices have rallied. Typical haven assets have also risen, including gold, the 10-year Treasury, and the U.S. dollar, albeit not by much. Other haven currencies, the yen and Swiss franc have barely budged.

 

U.S. equity markets opened down with strength in energy, utilities and defense names. Airlines are the weakest sector. The U.K. stock market decline is less severe, helped more by greater oil concentration. The VIX Index, a measure of U.S. stock market volatility, initially spiked from 18 to 22.

 

 

What to watch for

 

The attack was not totally unexpected. Betting markets were expecting a high likelihood of attacks in June, the U.S. removed embassy staff from Iraq and some had speculated recent OPEC supply hikes were anticipatory. However, it’s certainly an escalation from Israel.

 

The question now is whether this is contained to Iran-Israel, or spills into a broader regional conflict. Key will be to watch if Iran attacks U.S. military or civilian targets or seeks to block the Strait of Hormuz, which controls up to 30% of global oil, an event likely to trigger oil prices rising well above $100/b (JPM believe $130/b in that scenario) which may impact the outlook for inflation, and therefore the Fed’s reaction function.

 

 

What could we expect?

 

Most commentators see attacks on U.S. infrastructure unlikely as it brings the U.S. military into play at a time Iran’s allies are either ineffective (Hamas/Syria) or diminished (Houthis and Hezbollah). Blocking the Strait of Hormuz would also be difficult, for it could cause retaliation from other exporters, including Saudi Arabia, and prevent their own shipments from getting to market. Absent that outcome, it’s expected there’s enough OPEC spare capacity to cover any shortfall from Iran, which perhaps explains why oil prices are not higher.

 

 

What don't we know

 

There remains a lot we don’t know. What is Russia or China’s reaction (China is the largest buyer of Iranian crude)? What is the U.S. reaction? We do know Trump would prefer to see oil prices lower, saying as much just yesterday and apparently the U.S. warned against strikes. But should Iran not attack U.S. targets, and should this be contained to Israel-Iran, then like most recent conflicts, we may not experience severe market dislocation.

 

 

What this means for our tactical asset allocation

 

If little else, these tragic events serve as a reminder of the importance of portfolio diversification, and cash liquidity. In our May tactical asset allocation meeting for our model portfolios, we used strength in U.S. equities to pare risk and move to neutral weight on U.S. equities. We also increased our weighting Treasury inflation-protected securities and infrastructure.

 

While left-tail risks from escalatory tariff impacts have diminished somewhat, ongoing uncertainty prevents a more positive posture. We are however overweight developed market equities ex U.S., and would lean into weakness save any escalation. In our June meeting, held earlier this week, we added to our infrastructure overweight. This was in response to our confidence artificial intelligence capital expenditure will accelerate, driving demand for energy infrastructure. Stronger oil and electricity prices would support this view as well.

 

Main Point

A Geopolitical Jolt on Markets

Equities declined and oil rose after the attack. The key question is whether the conflict broadens and to create a more significant impact on markets.

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