Markets are weighing two divergent scenarios for the conflict involving Iran: a short-lived easing that could allow financial conditions to normalize, or continued escalation with deeper economic consequences. That framework is laid out by Matt Gertken, chief geopolitical strategist at BCA, who emphasizes the central role of political incentives in Washington in determining which path unfolds.
Gertken stresses he is not committed to a single outcome, but contends that recent events have weakened the case for an immediate ceasefire. He points to attacks on two oil tankers on March 31 and April 1 and the U.S. decision to deploy a third aircraft carrier to the region as developments that, in his words, "disconfirm an early and quick ceasefire." Those same facts, he notes, do not exclude either a drawn-out conflict or a wider escalation.
One signal that could materially alter market sentiment, according to Gertken, is a clear improvement in commercial traffic through the Strait of Hormuz. Reports that Iran and Oman may be exploring a framework to monitor and clear shipping through the Strait present a potential route to temporary de-escalation. If transit volumes rise and attacks on energy production and maritime traffic ease, Gertken says global markets should begin to recover.
U.S. domestic politics, he argues, determine how attractive that temporary easing will be to the White House. With weak domestic polling, Gertken contends the president would have an incentive to negotiate a solution that reduces the economic shock. As long as Republicans retain a realistic chance of salvaging Senate control in the midterm election, BCA envisions an unusual interim arrangement: Iran monitors traffic, shipping flows improve, and oil prices retreat.
But that calculus changes if the midterm election starts to look unwinnable for the president's party. "Once the midterm is deemed lost, the president has an incentive to maximize his military victory rather than minimize his economic defeat," Gertken wrote. That passage is a key conclusion of the note: when the political benefit of cushioning the economy fades, the administration may become more willing to pursue a harder military objective.
BCA cautions that continued strikes on regional energy supplies could inflict economic and financial damage that becomes, in its language, "irreparable by mid-April," at which point the midterm election would become "a lost cause." In that scenario, the strategist warns the White House would shift its goal "from leadership change to regime change."
There remains, however, a constructive path for markets in the second quarter. If the U.S. ceases fire and Iran reciprocates by halting attacks, particularly those targeting energy infrastructure and maritime traffic, the conflict would de-escalate. Under that outcome Gertken anticipates oil prices would fall, bond yields would decline, and equities would rally, with cyclicals and international stocks likely outperforming. He cites the relief rally from March 30 to April 1 as an example of how markets could react to such a development.
Even so, BCA does not expect any calm to be enduring. The note argues Iran would likely refuse to abandon its nuclear program or relinquish its effective control over traffic through the Strait of Hormuz, while the U.S. would be unwilling to accept Iran's sovereign control of a waterway it deems critical. According to the note, Washington cannot credibly assure Tehran it will not eventually seek to remove the regime, and Iran will want to retain leverage and prepare for future rounds of confrontation.
Gertken frames the investor choice starkly: face escalation now or postpone it and confront escalation later. Against that backdrop, his guidance to market participants is to stay defensive into the second quarter, while also maintaining hedges or positions that would benefit if shipping traffic improves and attacks on energy assets abate.
Sectors highlighted: energy, shipping, bond markets, cyclical equities, international equities.