Commodity and FX markets entered the weekend under the impression that the US and Iran made “significant progress” in last week’s negotiations. Hence the first order reaction to the weekend's escalation will likely see the dollar benefit on the back of higher energy prices and elevated risk aversion - to the tune of c. 0.5-1% for every 10% increase in oil. Currencies sensitive to energy prices and a flatter US curve, such as the Yen, may come under pressure. Our own view is that current events in Iran might take few weeks to fully unfold. We will have news flows on both sides of the event i.e. peace efforts and further ratcheting up in war efforts. Indications from Trump’s statement since the war started yesterday looks to us that this is likely to be a prolonged military conflict, much longer lasting and broader than what we saw last year. Iran’s supreme leader was killed in US–Israeli airstrikes, a seismic development in a conflict that’s spread to half a dozen countries across the Middle East and threatens to disrupt energy flows. The current US strategy appears to be closer to what Bill Clinton authorized in the Balkans: American airpower plus support for indigenous forces with their own reasons to fight, without American ground troops governing foreign cities. We believe a post Khamenei era is likely to be more conservative and not softer as some strategists are pointing out. This new breed of IRGC administration might be worse for Iranian people than Khamenei himself. Iran has built a multi layered contingency plan for this situation only. We would not probably know who the current Supreme Leader is for the next few weeks because Iran risks losing the new one too in light of continued leaks to Israeli and US intelligence. We expect to see news driven market gyrations across asset classes. Equities likely to see significant downturn because it was the least prepared for the current sequence of events. On S&P500, we believe we are headed towards 200 DMA at 6550 which is also the 23.6% retracement of the top of 6977 till 5115, the rally which started in April’2025. On Brent, first stop is $80 levels which was the June’25 highs when Iran nuclear facilities were attacked in joint airstrikes from Israel & US. While there are some market opinions that OPEC might increase it’s supply in today’s meeting, we beg to differ. At the end of the day, crude has to pass through strait of Hormuz. If no ships go through Hormuz, it does not matter where the output level is from OPEC. In Fx, we like to buy CHFJPY to buy on Monday opening and keep the risk open for next few weeks. Friday’s close was 202.87. We like to buy in the range of 200-204 for eventual target of 210. Stop to this view is 198. On UST curve, we are waiting for opportune levels to put on steepeners around 20-22 levels with a profit target of 35-40 in next few weeks. Stop to this view is 15.
