Based on markets over the weekend, initial reactions to the US and Israel military actions on Iran were largely as expected: broadly stronger USD (with relative “safe havens” benefiting), higher oil and gold prices, and US equities and bitcoin lower. However, despite news that Iran’s supreme leader Khamenei died after the attacks and Iran’s revolutionary guard and Iran new agencies suggesting the Strait of Hormuz is shut, Bitcoin (a proxy for risk assets but less the case with oil) have pulled back from most of the initial moves. There remains relatively high near-term uncertainty regarding further potential US/Israel/Iran (or related) exchanges, with global market concerns mainly centred on whether the impact on transit through the Strait of Hormuz will be prolonged, with oil flows through the strait accounting for around 20% of global supply. Our own view on Iran events is that it is going to be a multi week drawn event. Till then we will Brent moving higher to $90-100 levels, gold testing $6000 levels and S&P500 testing 6000 levels. 10yr UST yields might push lower towards 3.85 but beyond this level, it might not drop further. Post the initial risk off, there might be massive selling in US assets as inflation fears take centre stage. DXY might strengthen initially but finally fall. On economic data front, we have a series of US data points (ISM manufacturing, ISM services, Retail sales) including the crucial Feb NFP (NonFarm Payroll) data due for release on 6th March. We expect nonfarm payrolls growth slowed to 75k in February, down from January’s peak, but still well above the 2025 run rate. This would bring the 3m average of nonfarm payrolls growth up to 84k, the fastest pace since January 2025. The unemployment rate likely remained steady at 4.3%. Measures of layoffs remain near historic lows, but we have not seen a convincing pickup in hiring and labor demand. We expect February NFP to solidify the narrative that the labor market has stabilized following last year’s slowdown scare. As a result of this labor market improvement, we expect the FOMC to keep policy unchanged through the remainder of Powell’s term as chair, through the March and April meetings. We continue to expect 2 cuts of 25 bps each in June & Sep as insurance cuts under new Fed Chair Kevin Warsh. This week all eyes will be on crude. In today’s meeting, OPEC+ agreed to resume oil production increases next month as a conflict sparked by US-Israeli strikes on Iran threatened to bolster a rally in crude prices. Key members led by Saudi Arabia and Russia which had paused a series of hikes during the first quarter will add 206,000 barrels a day. But In our view, the above increase won’t move the needle for Brent bulls. As long as there are question marks over safety of ships in Strait of Hormuz, Brent might remain bid only. Our first target is $80 per barrel for Brent which was the high during last year June events when Israel & US had bombed Iran’s nuclear sites. The Islamic Republic itself pumps about 3.3 million barrels a day, or 3% of global output, making it the fourth-largest producer in OPEC. It exports currently 1.5 mbpd mostly to China. If this 1.5 mbpd gets offline due to Israel/US attacks on Iranian energy infrastructure, we see Brent going to $90 levels. In response if IRGC or the new Iranian political leadership decides to block strait of Hormuz, we expect $110 levels on Brent till the time US military is able to provide a guaranteed safety to ships transiting through Strait of Hormuz. In short term, Brent has more levers working for upward bias then any downtrend as long as there is no ceasefire from Iran or Israel/US front.
