OCBC: Will the Israel-Iran Conflict Escalate?
Last week saw an intense exchange of attacks between Israel and Iran, marking a significant shift away from proxy wars. OCBC comments on whether or not the conflict could escalate and how this could impact markets.
On the night between June 12 and 13, Israel launched a massive airstrike targeting Iran’s nuclear program and regime leadership. In response, Iran launched retaliatory strikes on Israeli cities, Tel Aviv and Haifa, and the conflict has since continued to see military exchanges.
«This is the first time that Israel and Iran have exchanged fire with such intensity,» said a note authored by Vasu Menon, managing director, investment strategy, OCBC.
«The two have been bitter enemies for decades, but so far, most of the conflict between them has been fought indirectly through Iranian proxies like Hamas and Hezbollah. Israel had threatened many times to attack Iran’s nuclear facilities, but it’s never done so officially, and not on the overt and significant scale that we saw last Friday.»
Tehran’s Survival
According to Menon, Israel Prime Minister Benjamin Netanyahu's comments on Iran as an existential threat suggest preparation for a «prolonged war with Iran until it is satisfied that Iran is no longer a military and nuclear threat».
«The attacks by Iran, and counter attacks by Israel, could escalate sharply if the current Iranian leadership fear that Israel could threaten the survival of the current Islamic regime that came into power following a revolution in 1979,» Menon underlined.
«There are also concerns that the current crisis may go beyond Israel and Iran and spark a wider conflict in the Middle East and even draw in other military superpowers like the US, Europe, China and Russia.»
Strait of Hormuz: Blockage Unlikely
A top worry for markets is oil prices, which rose sharply, and the possibility that Iran could block the Strait of Hormuz – a key passage that sees the movement of 20 million barrels of oil per day, or about 20 percent of global oil shipments.
Menon highlights two reasons this may not occur. Firstly, Iran is likely to see a backlash from China, its largest oil customer and trading partner. Secondly, Washington could respond strongly via a naval fleet base in Bahrain, resulting in the unfavorable inclusion of the US as an opponent.
Disruption of Iranian Oil
Another worry is about the disruption of Iranian oil if its energy facilities are destroyed by the attacks. Iran has said that its targeted Shahra oil depot in Tehran is under control but there are other news reports that said that production has been suspended at the world’s largest gas field in southern Bushehr province.
«It remains to be seen if Israel will launch further attacks on Iranian energy infrastructure, although this will probably earn the disapproval of the US, and more specifically Trump, who is in favor of lower oil prices,» Menon said. «Higher oil prices could also be contained if OPEC, and especially Saudi Arabia, agrees to raise output. The US could also release supply from its strategic oil reserve.»
Investor Impact
Menon expects the crisis to cause more market volatility but he believes that the global equity bull run remains intact as long as it doesn’t result in «sharply higher inflation and cause a global recession». He also highlighted that there is a lot of sidelined liquidity that could provide support in the event of market pullbacks.
«Market have been very resilient this year despite tariffs shocks, inflation fears and geopolitical concerns. While these events caused brief selloffs, stock prices rebounded afterwards, and the snapbacks have been relatively fast and sharp,» Menon added.
«Having said that however, there is scope for safe havens like gold to continue rising as global uncertainties are likely to remain a fixture, and as global central banks continue to diversify away from their US dollar holdings towards gold. We see gold rising to $3,900/ounce over a 12-month horizon.»
