Israel-Iran conflict at a critical juncture
164 Monday, 23 June 2025 12:43
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Over the weekend, US military strikes on Iran’s nuclear facilities further escalated tensions in the Middle East, heightening the risk of retaliation. In response, Iran's parliament voted to support closing the Strait of Hormuz, though the final decision rests with the Supreme National Security Council. The primary risk remains a potential spike in oil prices to $100 per barrel or more, which could lead to a stagflation scenario for markets. In this worst-case scenario, both equities and bonds would likely suffer, while inflation-linked securities, commodities, and the USD might serve as effective hedges, similar to the situation in 2022 when Russia invaded Ukraine.
The worst-case scenario can nonetheless be avoided. Reports indicate that Iran has the capability to close the Strait of Hormuz, potentially by laying mines or attempting to strike or seize vessels in the Gulf. Although the Strait has never been fully blocked, it has faced disruptions several times over the past 50 years. However, oil shipments to China also transit through the Strait, and Iran would risk losing one of its few supporters if it causes major disruptions to global oil markets. Our report shows that Iran’s oil exports (1.5 mb/d) could be replaced within days by OPEC, particularly Saudi Arabia, which currently has a spare capacity of nearly 5 mb/d.
As we go to press, financial markets are not in panic mode. Currently, equity markets in Europe and China, as well as US futures, are flat to slightly positive. Crude oil prices are also flat, and gold is marginally down, while the US Dollar is slightly up. Notably, the US Dollar rebounded last week while gold declined, suggesting that the US Dollar continues to serve as a safe haven during times of uncertainty.
Meanwhile, global central banks are not expressing concerns about renewed inflation risk. Last week, the Fed, along with the BoJ and the BoE, stayed put. But the Fed is leaning towards a rate cut in July or (more likely in our view) in September.
- Switzerland revisits ZIRP (zero interest rate policy). Last week, the Swiss National Bank cut policy rates to 0%. Switzerland is accustomed to low rates, having spent much of the past decade in negative territory. An important question mark is whether the ECB will eventually follow the SNB's lead and be compelled to cut rates more than the governing council currently anticipates. The spread between the ECB and the SNB remains near record highs, yet the EUR/CHF parity remains stable. Switzerland's robust export economy and the safe haven status of its currency, underpinned by an accumulation of foreign assets, contribute to this stability. Swiss real estate appears to be one of the largest beneficiaries of low rates.
Week ahead: preliminary PMIs for June will be released in major economies. In the US, personal income, spending and the PCE price index, the Fed’s preferred measure of inflation, will be released for May. The Conference Board consumer sentiment survey for June will also be available in the US.
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