Iran-Israel tensions should dissipate after latest flare up

The military escalation between Iran and Israel has ratcheted up fears of an expanded Middle East conflict. The suspected Israeli strike on Iran’s consulate in Syria on April 1 was the catalyst for Iran’s first ever direct drone and missile attack on Israel on April 13. According to Iran’s UN mission statement it now considers the matter concluded and the countries even. Israel reported minor damage to military targets thanks to abundant warnings and its rocket defence system, but it is unlikely to shrug off the attack. Still, we think it will be cautious in calibrating its retaliation to limit the economic fallout in the region and globally.

What you will learn:

• The threat of counter strikes by Israel is clearly heightened, but we think both sides will ultimately seek to avoid a costly all-out war.
• The market response suggests assessments of an escalation of the conflict have not materially changed following the events of the weekend. The shekel, the Tel Aviv stock market, and other regional bourses were all up this morning and Brent crude oil price slid 1%, below $90pb.
• Growing fears of a wider regional conflict alongside OPEC+ supply cutbacks and an improving outlook for demand have recently pushed Brent crude prices above the $90pb level for the first time since October. Uncertainty over Israel’s response will sustain the geopolitical risk premium, which we estimated at around US$5pb ahead of the latest attack.