US bombing of Iran fails to shake financial markets, but are traders too complacent?
The US has fulfilled a decades-old parody of the Beach Boys' Barbara Ann with its decision to bomb Iran.
Bomb Iran was infamously sung on stage by one-time Republican presidential candidate the late John McCain in 2007 but now Donald Trump has gone ahead and done it with the biggest conventional bombs available.
It's always been a bad joke, but its realisation is sickeningly risky.
Perhaps even more dangerous than the attacks on Iran's nuclear facilities is the ongoing threat of regime change wielded by Trump and Israeli Prime Minister Benjamin Netanyahu.
If taken seriously by Iran's Supreme Leader Ayatollah Ali Khamenei and his leadership circle, including the Islamic Revolutionary Guard Corps, it raises the spectre of a doomed group who may opt to go down in a blaze of glory, rather than face assassination by their external enemies or execution by the Iranians they have persecuted for decades.
For all the commentary that Iran has few means of retaliation for these strikes, the reality is that Iran has significant amounts of highly radioactive materials, a still-formidable number of rockets and a number of fighters (Iranians and regional allies) willing to lay down their lives to defend the Islamic Republic.
As Rabobank's global strategist Michael Every points out, financial markets (and, arguably, Netanyahu and Trump) are betting on a rational and calculated response from Tehran.
"Iran's parliament has voted to close the Strait of Hormuz in retaliation for the US strike on its nuclear programme, with the final decision resting with their national security council," he notes.
"This would be unprecedented: economically ruinous for them and for the world, almost impossible for them to do, as is, would ensure almost everyone who can would confront them to reopen the Strait. But … it's likely to see war insurance risk soar, and therefore push oil and LNG prices far higher.
For now, we appear to be in the relative calm that exists at the eye of a cyclone.
After initially jumping more than 4 per cent above $US80 a barrel, benchmark Brent crude oil futures were just over 1 per cent higher late in the Australian trading day.
The Australian share market lost about a third of a per cent — a trivial sell-down — with some regional markets in Hong Kong and Shanghai actually gaining on the day.
US futures were down just 0.1 per cent, so the reaction in New York looks set to be muted as well.
"They're behaving like a normal Monday. And that I find extremely interesting," notes Swissquote Bank senior analyst Ipek Ozkardeskaya.
Perhaps that was an intended benefit of conducting the strike over the weekend, when there was no opportunity for an instant negative knee-jerk reaction on major markets (share markets in the Gulf and Israel were open on Sunday, however, and also shrugged off the direct US involvement).
But Helima Croft, the head of global commodity strategy at RBC Capital Markets, warns against a different kind of knee-jerk reaction.
"It may take a few days or even weeks to discern the Iranian response to this unprecedented attack on its nuclear facilities and key personnel.
"Above all, we would caution against the knee-jerk 'the worst is behind us' hot take at this stage.
"President Trump may indeed have successfully executed an 'escalate to de-escalate' move, but a wider expansion cannot still be ruled out at this juncture."
She warns that Iran does not have to succeed in fully blocking the Strait of Hormuz — through which about a fifth of the world's oil and a quarter of LNG cargoes sail — in order to cause pain for the rest of the world.
"We do not believe it is a 'full closure or nothing' scenario when it comes to the waterway, and Iran may deploy their asymmetric capabilities to raise the economic cost of the combined US/Israeli operations," she cautions.
"We were also told last week in Washington that Iran retains enough short-range missiles to attack Gulf energy facilities and US bases in the region."
After all, Iran and its regional allies were accused of inflicting serious damage on Saudi oil infrastructure along with several tankers in 2019, apparently in response to US sanctions on Iran.
Veteran AMP chief economist Shane Oliver says those kinds of attacks remain a worrying prospect, and one that traders appear to be heavily discounting as a risk.
"So far, oil prices are up on the uncertainty — but only by 12 per cent since the war started and still below average 2024 levels," he notes.
"Any disruption could push oil prices above $US100 a barrel, possibly to around $US150/barrel.
"This would likely only be brief, as the US military would likely quickly move to stop Iran. But even if it's only for a few weeks, it would still be a big blow to confidence regarding the economic outlook and so could push shares down by 5-10 per cent at least."
That has implications for household budgets.
"$US100 a barrel oil could add another 25 cents a litre to Australian petrol prices on top of the 15 cents a litre rise implied by current oil prices," Oliver notes.
But there are plenty of analysts backing the market pricing and assuming that this particular storm will just blow over.
"While I've long held the view that strategic considerations (particularly toward Iran-friendly Qatar and its vital LNG exports) and Iran's dependence on China (its largest oil customer) would act as a restraining force, this remains true (only) as long as Iran's own oil export facilities are not targeted," notes Ole S Hansen, Saxo's head of commodity strategy.
Given that we're talking about a 46-year-old regime threatened with collapse, led by an 86-year-old cleric who professes to believe in an afterlife, with significant quantities of enriched uranium and other highly radioactive materials at hand, this geopolitical risk premium seems fairly modest.
As Every argues, markets are effectively betting the Iranian leadership still has a solid, rational belief in self-preservation.
For the Middle East in particular, and the world in general, we have to hope the markets are right.
The absolute worst-case outcomes do not bear thinking about.
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