Special Note on the Iran Conflict

March 1, 2025

What We Know So Far

The US joined Israel in launching an attack on Iran overnight February 27/28, following weeks of buildup. The actions have been termed Operation Epic Fury. The US had been moving military assets into position over the past few weeks as negotiations to eliminate nuclear weapons failed to reach a positive conclusion. This marks a distinctly different type of military operation than Operation Hammer in June of last year, with the expectation for this to be a rolling operation conducted over several days or weeks.

President Trump highlighted distinct goals from the operation, including an urging for the Iranian people to retake their government. This follows months of escalating and bloody protests by the Iranian citizens. Other goals more directly applicable to security were highlighted by the intention to stop Iran from building a nuclear bomb.

In addition to Israel, Iran has also launched attacks on perceived safeholds such as Dubai, Jordan and Abu Dhabi, with limited but important impact thus far. Saudi Arabia and the United Arab Emirates has stepped up their criticism of the Iran actions, increasingly isolating them within the region. Supreme Leader Ayatollah Ali Khamenei was killed and a provisional leadership council has been formed until a new leader is named. Khamenei had ruled Iran as the head of the Islamic Republic for more than three decades and was well-known for his anti-west beliefs.

Ongoing and Potential Implications

One immediate implication is a reduction in the supply of oil given the large quantities produced in Iran (approximately 5% of global supply) and subsequently shipped to the rest of the world. There have been multiple reports of attacks on tanker ships, leading to most others pausing or delaying transportation plans. In response, OPEC+ has agreed in principle to increase oil production next month to 206,000 barrels per day, which may at least partially and temporarily mitigate increases in the oil prices. It is also worth noting that the US is less sensitive to international oil production activity given our current status as net oil exporter. Regardless, the conflict is likely to be inflationary at least for as long as the result is even moderately restricted global oil supply.

The potential spillover to financial markets is likely to be diverse and uncertain. In addition to expected upward pressures on oil prices, and the predicted challenges faced by transportation and logistics companies, bigger picture portfolio adjustments that tilt in the direction of safety plays can be expected. It is typical in periods such as these to see a movement towards safe havens such as the US dollar and other developed market currencies. Other traditional risk-off plays such as gold and US government bonds are also likely to gain bids. Exchanges in the region directly affected by the conflict have opened soft today but are thus far not reflective of financial panic.

Futures markets in the US are indicating the expected playbook will indeed be the first line of action, with the dollar and US treasuries being bought up and equity markets selling off. However, it is much too soon to know if this action will accelerate or reverse given the early innings and mosaic of incoming information.

Conclusion

These events mark a meaningful escalation in what has been a percolating geopolitical event. As with all things of this nature, the political factions both domestically and abroad are speaking loudly as to their opinion on the legality and effectiveness of these conflicts. We are saddened by all those negatively affected – and particularly by the reports of the casualties of at least three U.S. service members. 

While all sides will continue to debate their cases, a primary concern for investors is whether these geopolitical events create a more general systematic risk-off attitude that will cause headwinds for further return advancement. Currently, those risks are certainly present, but do not appear to be taking over sentiment en masse. We will continue to monitor these events and financial market responses closely in the days and weeks ahead.  

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