Planned further US strikes on Iran push oil prices higher
CIO Daily Updates
From the studio
From the studio
Thought of the day
Thought of the day
What happened?
US President Donald Trump, in a live address to the nation on Wednesday evening, said core US objectives in Iran “are nearing completion,” reiterating that the war will end “very soon.” He added that energy prices would go down and stocks would go up once the war concludes.
However, he also said that the US will hit Iran “extremely hard” in the next two to three weeks, and that targets would include electricity generating plants—if no deal were to be reached between the US and Iran. Trump provided no new details on the reopening of the Strait of Hormuz or signs of a lasting solution. Instead, he urged countries that depend on oil flows through the waterway to find “delayed courage” to solve the issue.
Brent crude jumped nearly 6% to above USD 106/bbl after Trump’s speech, from around USD 100/bbl before the address when hopes for a possible off-ramp to the conflict had lifted market sentiment over the past two days. At the time of writing, Brent is trading at USD 108.6/bbl. The Nikkei 225 fell 2.4% and the Kospi declined 4.5% on Thursday, while S&P 500 futures are 1.2% lower at the time of writing. The US dollar strengthened.
What do we think?
With no clear signals over how the Iran war will come to an end, Trump threatening potential escalation ahead, and the Strait of Hormuz still effectively closed, risk sentiment has retreated again amid inflation and economic growth worries.
We have advised investors to prepare for the possibility that the war will escalate in the coming weeks before a clearer path to de-escalation emerges. Whether military action to assert greater US control over the Strait of Hormuz will lead to a negotiated settlement remains uncertain. The potential responses from Iran, Israel, and Gulf states are also unclear.
We have also said that the longer the conflict lasts, the higher energy prices are likely to rise, and the greater the negative economic and market consequences.
Still, investors should avoid reacting too aggressively to each geopolitical turn and instead use volatility to improve portfolio quality and resilience. The sharp moves in equities and bonds earlier this week following signs of possible de-escalation are a reminder that markets tend to move ahead of confirmed political outcomes. We believe that the recent market swings support a balanced approach to investing rather than a binary one.
What should investors do?
We remain positioned for medium-term upside in global equities while continuing to diversify and hedge portfolios against the risk that energy prices stay higher for longer.
In equities, that means being selective around markets more vulnerable to elevated oil prices, while considering opportunities in more defensive markets with secular growth and limited exposure to energy disruptions, including Swiss equities and European health care. Investors can also potentially improve portfolio resilience by replacing a portion of direct equity exposure with structured investment strategies with capital preservation features.
In fixed income, we continue to see value in short-duration quality bonds as a way to lock in still-attractive yields.
Investors seeking broader portfolio resilience can consider diversifying beyond traditional asset classes, hedging, and progressive de-risking. Exposure to commodities, including oil and around a mid-single-digit percentage allocation to gold, may also help diversify portfolios and provide some insulation from macro-related shocks.