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The United States and Israel have launched coordinated air strikes inside Iran under “Operation Epic Fury.” US President Trump’s overt regime-change messaging raises the odds of a sustained campaign, not a contained exchange, in our view. For markets, the swing factor is whether escalation stays military-to-military or migrates into significant and prolonged energy + logistics disruption, embedding a higher equity risk premium.

What we are watching

  1. Strait of Hormuz: any mining, vessel seizures, or IRGC Navy interceptions. This is the single most important variable for oil, equity markets and inflation risks.
  2. Iranian retaliation scope: whether strikes expand to Gulf Cooperation Council (GCC) energy infrastructure (refineries, pipelines, desalination) or remains centred on US military assets in the GCC.
  3. OPEC+ response: Abu Dhabi has already signalled increased April exports; Saudi may follow.
  4. Actions of Iran’s regional proxies: Hezbollah in Lebanon, Shia militias in Iraq and the Houthis in Yemen as a potential indicator of conflict escalation.

The manifestation of one or more of these factors would signal the conflict may last longer and be more durable than is currently priced into markets at this early stage of the conflict.  Mediation by Oman/Qatar to end the conflict is balancing this negative scenario. Both have facilitated recent Iran/US indirect talks. So called “talks about talks” should help reduce risk premia and drive a potential recovery in equity markets.

Our analysis suggests markets are telling a more nuanced story than the headlines and 24-hour news channels suggest. They are currently pricing a crisis, not a catastrophe.

Global equity markets opened lower on Monday, March 2, but buyers emerged during the day. The MSCI All Country World Index finished the day down only by 0.66%.1 The pattern is similar to the US attack on Iran’s nuclear facilities in June 2025—initial weakness giving way to a recovery as buyers emerged. The defensive and energy sectors acted as a shock absorber for the weakness in high-beta sectors.

Oil tells the most revealing story. Brent oil prices spiked to US$82 at the open on Monday, reacting to the closure of the Straits of Hormuz, then retraced some of these gains. The reversal matters. The market priced the worst-case scenario at the opening, digested it, then partially unwound it on expectations there will be a supply response from OPEC.

Our analysis across equities, oil, gold, and sovereign risk confirms that markets are still assigning the highest probability to our base case: Contained escalation with wider rules of engagement, where the US leverages the power vacuum to press for resolution. Investors remain cautious but are giving the contained escalation thesis the benefit of the doubt, and we believe the Brent reversal is the clearest expression of that view.

What would change this base-case view: sustained closure of the Straits of Hormuz, a material escalation by the Iran Revolutionary Guard Corps (IGRC), or President Trump. Conversely, markets would probably view a signal from Iran to enter “talks about talks” positively.

EndNotes

  1. The MSCI World Index is a global equity index covering large- and mid-cap stocks across 23 developed and 24 emerging markets, representing approximately 85% of the global investable equity market. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. <strong>Past performance is not an indicator or a guarantee of future results.

 

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