Given Donald Trump was elected on an anti-war ticket, it came as a surprise to many when the US president authorised ‘Operation Midnight Hammer’ last month. Perhaps even more surprising, though, was that markets proved rather resilient to this turn of events.
Despite some fluctuations in oil prices, the impact was minimal and equity markets remained largely unmoved. Trump ordered strikes on Iranian nuclear facilities and global markets basically shrugged.
Now, however, the chances of future American military intervention are harder to rule out. With that in mind, it s worth considering the best and worst-case scenarios and looking at previous conflicts to understand how markets could react.
Market impact of US intervention
Markets are usually sensitive to US military action so let’s consider some of the factors behind Midnight Hammer. A long-standing hardliner on Iran, Trump ordered precise strikes on nuclear facilities with the aim of stopping uranium enrichment reaching weapons-grade levels. Tehran’s response – a strike on a US base in Qatar – was considered by many to be largely performative and indicating a reluctance to escalate.
Notably, support for the operation did not split along Republican and Democrat lines. Even within the ‘MAGA’ movement, divisions emerged, suggesting any future interventions may not enjoy Trump’s usual support.
So, how did the markets respond? As mentioned earlier, they were largely unconcerned, with key asset classes remained stable. None of the distress seen during ‘Liberation Day’ – when the FTSE All-Share fell 4.87%, the S&P 500 5.97% and the Nikkei 225 7.83% – was on display.
The key test for market resilience would have been Iran shutting the Strait of Hormuz, through which 20% of the world’s oil travels. Some speculated this could push oil to $130 a barrel but, although Tehran approved the action ‘if necessary’, it was generally viewed as an empty threat.
After all, Iran would have suffered far more economic damage from closing the passage than energy-independent America – and that is without considering the strain such a decision would put on its relationship with China, which receives 13.6% of its Brent crude from Iran.
Lessons from other conflicts
In contrast, the market response to Russia’s invasion of Ukraine was far more dramatic. Pre-war, Russia held a more active role in the global economy than Iran does today – particularly in energy and finance – so, in combination with post-Covid inflation, the conflict delivered a stronger shock to growth.
The 2003 Iraq invasion also looms large in investor memory. Interestingly, much of the market stress occurred before the conflict when the uncertainty was greater. Once troops are deployed, it becomes almost impossible to predict an exit strategy or confirm progress so formulating clear trading strategies becomes more difficult.
“Once troops are deployed, it becomes almost impossible to predict an exit strategy or confirm progress so formulating clear trading strategies becomes more difficult.
A key takeaway from both the previous trade negotiations and the Iran strikes is that markets may be adapting to Trump’s unpredictability.”
Although Operation Midnight Hammer was unexpected, it was restrained while its stated aim – to disrupt Iran’s nuclear ambitions – appears to have been achieved. Now the best-case scenario is a continued cessation of hostilities, negotiation of a new nuclear deal and unhindered oil flowing through Hormuz. This would reassure markets the strikes were a one-off and there is little chance of a prolonged conflict.
The worst-case scenario, on the other hand, involves the ceasefire breaking, closure of Hormuz and a US troop deployment. This would likely cause oil prices to rise, triggering inflation and increasing defence spending. In turn, this could push up borrowing and put pressure on US treasury yields, heightening uncertainty and diminishing market confidence.
Trump’s criticism of both Iran and Israel for ceasefire violations suggests he is committed to a lasting cessation of hostilities. With the nuclear programme disrupted, the world’s most powerful ‘Iran-hawk’ might prefer using non-military means to undermine the regime. This view is supported by his administration recently imposing new sanctions on a network of businesses allegedly involved with Iranian oil trading.
The risk of conflict remains higher than before but it is important not to lose sight of other developing events. Tariffs are again dominating headlines, with ever-moving deadlines and deals.
A key takeaway from both the previous trade negotiations and the Iran strikes is that markets may be adapting to Trump’s unpredictability. Some analysts are even taking the ‘TACO’ view – that ‘Trump Always Chickens Out’ – but that is not an excuse for complacency. As geopolitical tensions appear set to continue, the outlook remains uncertain, with the likelihood of further market volatility. Diversification and keeping a calm head remain essential.
Peter Wasko is a senior portfolio manager at Copia Capital
