Key insights
- BCA strategist suggests US policy toward Iran is tied to midterm election prospects. A likely loss could incentivize a more aggressive military stance, disrupting energy supply and potentially increasing oil prices. Improved Strait of Hormuz traffic could signal de-escalation and market recovery. The US equity market impact is negative due to potential inflationary pressures and geopolitical instability.
Investing.com-- Markets are now caught between two competing paths for the Iran conflict—near-term de-escalation or a deeper, more damaging escalation—with political incentives in Washington playing a key role, according to BCA’s chief geopolitical strategist Matt Gertken.
Gertken said he is not “stubborn or dogmatic” about how the conflict ends, but argues that recent developments do not support hopes for a quick ceasefire. Iran struck two oil tankers on March 31 and April 1, while the U.S. is sending a third aircraft carrier to the region. In his view, those facts “disconfirm an early and quick ceasefire.” At the same time, they do not rule out either a continuous war or a broader escalation.
What could start to change the market mood, he says, is a visible improvement in Strait of Hormuz traffic. Reports that Iran and Oman may be working on a framework to monitor and clear shipping through the Strait offer one possible path to temporary de-escalation. If traffic rises and attacks on energy production and shipping ease, Gertken says global financial markets should begin to recover.
That is where U.S. politics comes in. Trump, he argues, needs to negotiate to reduce the economic shock because of weak domestic polling. As long as Republicans still have a realistic chance of salvaging Senate control in the midterm election, Trump can tolerate what BCA describes as an unusual interim arrangement: Iran monitors traffic, flows improve, and oil prices fall.
But that political logic changes sharply if the election begins to look out of reach. “Once the midterm is deemed lost, the president has an incentive to maximize his military victory rather than minimize his economic defeat,” Gertken wrote. That is one of the note’s most important conclusions. In other words, if the political benefit of cushioning the economy fades, the White House may become more willing to pursue a harder military objective.
BCA warns that if Iran keeps striking regional energy supply, the economic and financial shock could become “irreparable by mid-April,” and the midterm election would become “a lost cause.” In that scenario, Trump would shift his objective “from leadership change to regime change.”
There is still a more constructive path for markets in Q2. If Trump ceases fire and Iran reciprocates by halting attacks, especially on energy supply, the conflict would de-escalate. Oil would fall, bond yields would decline, and stocks would rally, with cyclicals and international equities likely outperforming. Gertken points to the relief rally from March 30 to April 1 as a reference for how markets could respond.
Still, BCA does not think any calm would be durable. Later, Iran would likely refuse to give up its nuclear program or direct control over Hormuz traffic, while the U.S. would be unwilling to accept Iran’s sovereignty over such a critical waterway. The note argues that Washington cannot credibly assure Tehran it will not eventually try to topple the regime, while Iran will want to preserve its leverage and prepare for another round.
That leaves investors facing what Gertken describes as escalation now or escalation later. The strategist advises investors to stay defensive heading into Q2, while also hedging against a rebound if shipping traffic improves and attacks on energy assets stop.