Earlier, we got a report from Axios suggesting that a war between the U.S. and Iran now appears increasingly likely. According to the sources cited, there is currently no sign of a diplomatic breakthrough between Washington and Tehran.
They also noted that, given Trump’s recent military build-up and escalated rhetoric, it may be difficult for him to de-escalate without Iran offering significant concessions on its nuclear program. The report added that any military operation in Iran would be massive, involving a weeks-long campaign that would resemble a full-fledged war.
Such an event would have disastrous effects on the markets and the economy...
First, we would see oil prices skyrocket due to the risk of disruption in the Strait of Hormuz, especially in light of the recent military drills. This would be a negative shock for the global economy and lead to stagflation risks.
The central banks would have a hard decision to make as cutting rates to support the economy could lead to more serious problems with inflation in the future, but letting the economy weaken hoping for the event to be "transitory" could end up in a recession.
The first reaction in the markets would be strong risk aversion. We would highly likely see a huge selloff in the stock market as future growth expectations would turn negative. Gold and silver would surge into new record highs on stagflation risks. The bond market is more likely to rally on expectations of a recession, especially in light of the selloff in the stock market.
But what about the US Dollar? Would we see it weaken again on geopolitical drama or not? This is the hardest question to answer, but given the severity of the event, I would expect it to rally. Traders would be better off taking more straight-forward opportunities though like going long on oil and gold, and short on the stock market.
In any case, keep a close eye on this risk, as it could have far greater consequences than expected.
