On the evening of June 12th, Israel launched a surprise attack on Iran hitting nuclear facilities, military sites and populated areas. The operation reportedly involved over 200 aircraft and 330 munitions, striking approximately 100 targets across Iran with key Iranian military leaders, along with six nuclear scientists, reportedly killed. In retaliation, Iran responded with a barrage of drones and ballistic missiles, some of which managed to evade the Israeli air defence systems, hitting residential areas.
Over the weekend we saw a significant escalation in the conflict with the United States launching “Operation Midnight Hammer,” a surprise strike using B-2 stealth bombers and submarine-fired Tomahawk missiles to attack three fortified underground nuclear facilities. This marks a major escalation in a conflict that has seen intermittent exchanges over the past year. What sets this episode apart is the sheer scale of the US strikes, which came with virtually no warning and directly targeted Iran’s fortified nuclear infrastructure, triggering heightened regional tensions and Iranian vows of retaliation.
As the conflict enters its second week, Israeli Prime Minister Netanyahu has vowed to press on, declaring that the military campaign against Iran will continue “for as many days as it takes.” The end goal for Israel has been to reduce the capability of Iran to gain a nuclear weapon. This open-ended commitment underscores the operation’s potentially prolonged nature, especially given the challenges of targeting Iran’s deeply fortified nuclear facilities. President Trump has claimed that the US intervention inflicted ‘monumental damage’ on Iran’s ability to develop a nuclear bomb; however, these assertions have yet to be independently verified.
America’s involvement significantly raises the stakes of the conflict, and the fact that it has launched a direct bombing campaign against Iran, an unprecedented move, should not be underestimated. At this stage, the world, and global markets, are bracing for what appears to be an inevitable Iranian response, with all options still firmly on the table. One of the most disruptive potential actions is Iran’s threat to shut the Strait of Hormuz, a critical maritime chokepoint through which nearly 20% of the world’s oil supply flows. If Iran were to successfully block the strait, oil prices would likely surge, triggering ripple effects across asset markets as the inflationary shock unsettles investor confidence and heightens global economic uncertainty.
This situation remains fluid, and we are monitoring developments closely. For now, the US has emphasised that they are not at war with Iran, but rather targeting its nuclear program, with no interest in a prolonged conflict. Washington has also urged China, whose energy security would be most heavily affected, to dissuade Iran from closing the Strait of Hormuz. Meanwhile, Russian President Putin has condemned the US strikes but has shown no intention of materially supporting Iran, highlighting the limited options Tehran currently has in terms of international allies.
The market reaction to the situation saw crude oil prices initially surge over 10% following the conflict’s outbreak but have since eased to around 7% higher. Global stock markets declined modestly, while safe-haven assets saw gains, with gold and the US dollar rising amid heightened market uncertainty. However, this market reaction needs to be viewed in context. Despite the geopolitical shock, oil prices remain well below the levels reached after the October 9, 2023, Hamas attacks on Israel, which first ignited this latest cycle of regional tension. More notably, oil prices are still far beneath the peaks seen during the onset of Russia’s invasion of Ukraine in early 2022, when oil prices surged to almost $130 per barrel, compared to current levels around $75.
Equity markets have also reacted with relative restraint; whereas previous conflict-driven shocks have triggered declines of more than 3% in global indices, the worst of the pullback was limited to around 1%. Although some may interpret this as market complacency, the more likely explanation is that investors have become desensitised to periodic escalations in the Iran-Israel conflict, which until now, have had minimal direct impact on global economic drivers. However, this tolerance has clear limits. Should Israel target Iran’s oil infrastructure, or Iran retaliate by disrupting Western-aligned interests, such as closing the Strait of Hormuz, the consequences would be far more severe. A sharp rise in energy prices would stoke inflationary pressures, and impact economic growth around the world. In that scenario, a significantly more pronounced market reaction would be likely.
Bottom line
We continue to monitor the market impact of the conflict and, at the time of writing, are happy that our allocation to assets such as gold, commodities and infrastructure provide reassuring diversification. However, should the situation escalate further, we remain prepared to act swiftly and make targeted adjustments to portfolios.
