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Today’s Points:

• The Israel-Iran conflict is over, as far as markets are concerned.
• It’s certainly not over for people in Israel and Iran.
• Iran is suing for peace; Israel is attacking Iran’s TV station.
• Bitcoin is surviving this Iran conflict much better than the last. 
• AND: Grenada — so much nicer than Cuba.

Cold-Blooded Calculation Versus Complacency

International markets appear to have convinced themselves that the latest  conflagration in the Middle East can be looked through as easily as all the region’s other flare-ups of the last decade. Are they right to do so?

Gold prices fell, Treasury yields rose, and equity volatility dropped Monday as Israel and Iran continue to pound each other with bombs and missiles. Most startlingly, stocks rebounded; relative to long bonds, they are their strongest since the day after President Donald Trump’s inaugural:

All the normal signs of a “risk-on environment” were in evidence. This despite the fact that an Israeli attack on Iranian nuclear facilities has long been regarded as “the Big One” that could transform the global risk environment for the worse. And yet the oil price fell Monday, and it’s far below its January peak:

Iran is now trying to find a way out of the conflict, but Israel has little desire to halt when it is on top. Arguably, there’s something “positive” in the absence of developments that might seriously constrict oil supply— closure of the Strait of Hormuz by Iran, or damage to Iranian oil production by Israel. But with Prime Minister Benjamin Netanyahu pressing on, the danger of such events in the future remains. 

So can the market calm possibly make sense? Here are the cases for and against:

The Case for Calm

Middle East conflicts matter to markets and the global economy because they can impact the oil price. On that basis, Israel has chosen a “good” time. Oil inventories are rising, and the OPEC+ countries have been trying to restrict supply. Many will be happy for an excuse not to go through with this. Such dynamics point to downward pressure on oil. This chart from Harry Colvin of Longview Economics in London illustrates what’s going on:

Longview points out that the oil market has a way of seeing Israel-Iran conflicts coming, and pricing them. Crude makes a high when the news breaks, and then subsides. This happened during the missile exchanges in April last year. Colvin comments that “a similar playbook may repeat this time,” given that the oil price was up 20% Friday from its lows May 5 – possibly in anticipation of the resumed conflict.

Further, history suggests that the oil price needs to double before it can inflict a recession in the west. Evidently that happened in the 1970s. This chart, drawn up with the St. Louis Federal Reserve’s FRED service by Nicholas Colas of DataTrek International, shows that from 1987 to the pandemic, recessions all followed close after a doubling of the oil price:

The other two doublings, in 1987 and 2010, came when oil was “normalizing after hitting multi-year lows rather than breaking out to decade-plus highs.” As the recent low was $57.50, that would imply that West Texas Intermediate needs to reach $115 before it forces a recession — and probably top its post-Ukraine invasion peak, when it spent a few days above $120. With WTI at $72, that’s a long way off.

Beyond the current specifics, history suggests that the market can deal with big geopolitical shocks just fine. Hitler’s invasion of France and the 1973 Yom Kippur War were big exceptions. Beyond that, Jim Reid of Deutsche Bank AG relays this statistic:

Historically, the S&P 500 tends to fall around -6% in the three weeks following a geopolitical shock, only to recover fully over the subsequent three weeks... The bar for a more significant selloff is higher this time, as equity positioning is already quite light — currently -0.33 standard deviations below the mean, or in the 28th percentile.

Deutsche’s researchers list 32 political events since 1939 that led to selloffs. They took a median of 16 trading days to hit bottom, and 17 days thereafter to recover all lost ground. Small wonder that traders look at any geopolitical dip as a chance to buy.  

There are also some surprises. The S&P 500 had recovered all its losses from the Cuban missile crisis of October 1962, the closest the world has come to nuclear Armageddon, within nine days. Two decades later, it would take 304 days to recover from another Caribbean confrontation, the US invasion of Grenada in October 1983. 

The variability between apparently similar events is also marked. Recovery from the Six-Day War of 1967 took 40 days; getting over the Yom Kippur War took 1,475 days (thanks largely to the subsequent Arab oil embargo). Tail risks exist. The point is that they are unlikely, but risk managers need to take account of them. 

The Case Against Complacency

Are the risks really so low? “The bar for what constitutes a Middle Eastern risk event of sufficient magnitude to hit the oil price has risen a lot,” says Tina Fordham of Fordham Global Foresight. “The advent of shale gas in the US genuinely reduces the ability of Middle Eastern events to affect the oil market. But it looks like the market has decided that risk has been invalidated altogether, and that’s a mistake.”

Thinking about the odds on what happens next, this schema from Andrew Bishop of Signum Global Advisors is a useful starting point:

• 20%: Preemptive Iranian capitulation (accepted by Israel).
• 45%: Israeli mission accomplished (followed by Iranian capitulation).
• 25%: US intervention.
• 10%: Iranian nuclear breakout surprise.

This seems about right; Israel started this, its military knows what it’s doing, it doesn’t want to stop, and the odds are that it will get what it wants. There is a two-thirds chance of an outcome that gives the market no problem. However, a 10% chance of a nuclear-armed Iran, perhaps particularly where there is an imminent risk of regime change, still seems a high enough chance of a bad enough outcome to justify taking at least some money off the table. 

There are also arguments that the most alarming possibilities wouldn’t hurt that much. If Iran were to close the Strait of Hormuz, Neil Crosby of Sparta Commodities points out that Western naval action to reopen it would be swift. And while any blockade lasted, it might not be as bad as it appears:

Saudi Arabia has spare crude production capacity but the real problem is export options. Saudi exports only ~1-1.5 million barrels per day (mbd) of crude through the West Coast and ~5mbd through the Strait of Hormuz. The East-West crude pipeline in Saudi was built for this scenario. There is ~5mbd in official capacity... that most likely have already been or can quickly be repurposed to carry crude west.

So in theory, most Saudi oil exports could be redirected from Hormuz. He stresses this is a “best-case” scenario, but it sounds good to traders. Game theory also backs the belief that the Strait will stay open. It’s a move that Iran can only make once, and that would annoy everyone in the world, not just Israel and the US. China, for example, would badly want to avoid a closure, and will presumably have told this to Iran. A similar argument might restrain Israel from attacking Iran’s oil production; its allies would not be happy about the consequences.

An oil tanker cruises toward the Strait of Hormuz off Oman. Photographer: Marwan Naamani/AFP/Getty

But none of this eliminates tail risks. Israel has the upper hand, but if it drives Iran to desperate responses, they could happen. Bombing the national television station smacks of adding insult to injury. It does nothing to thwart nuclear proliferation, but appears instead to be pushing for regime change. Few would grieve the fall of this Iranian government, just as few shed a tear for Saddam Hussein in Iraq — but subsequent events there showed how risky such a gambit could be. 

There are also risks in making Iran desperate. Matt Gertken of BCA Research suggests Israel’s attacks “will continue until Iran is forced to strike regional oil supply to get the US to restrain Israel.” That may not work — and Trump’s mercurial personality adds to the unpredictability. Thus, for Gertken, investors should prepare for a broader economic impact.

It’s probably all going to be OK. But the chances that it will be much, much worse are still too high for the risks that investors are currently running. 

Bitcoin’s Transition 

Once more, Bitcoin is struggling to justify its credibility as a haven, but it looks great as a “risk-on” vehicle. Thursday’s selloff as the Israel-Iran hostilities escalated was short-lived, and then the currency surged as much as 4.9% on Monday. That’s better than gold, which thrives in times like these, which fell almost 1%, although its record high is still within touching distance:

Bitcoin does not rival gold as a haven asset. But it may be developing. In this note, analysts at crypto investment advisory firm Frnt Financial note a stark difference in the asset’s reaction to last April’s Israel-Iran hostility.

Then, Bitcoin sold off by about 13%, likely due to shorter-term momentum traders seeking to rebalance risk. Thursday night’s selloff might well have been driven by a search to raise cash fast. But there could be more to it. Frnt Financial says:

For Bitcoin proponents, the asset’s haven qualities have been evident since its inception. However, in 2025, the idea has been brought to a wider audience by factors such as Larry Fink’s advocacy or US Vice President JD Vance proclaiming that BTC is “becoming a strategic asset for the US” last month.

Arca Investments’ Jeff Dorman argues that investors are asking more challenging questions and seeking assets that resemble traditional financial instruments. This opens the door to institutional capital, pension funds, endowments, and sovereign wealth funds that aren’t chasing the next meme coin; they instead are increasingly focused on assets that generate yield, cash flows, and governance rights:

Firms such as Fidelity Digital Assets, Franklin Templeton, and BlackRock have already begun integrating these principles into their cryptocurrency strategies. Their interest lies in “crypto with cash flow,” not just crypto with a community.

Regulation explains this. Under Gary Gensler, the Securities and Exchange Commission targeted projects that return value to token holders, labeling many as unregistered securities. The new regime aims to allow institutions to adopt digital assets. It makes for a far more conventional and institutionalized asset than its founders envisaged — but it does seem to hold up better in a crisis.

—Richard Abbey

Survival Tips

Returning to Grenada, the Spice Isle, it’s one of my favorite places on the planet. Not only did it do more lasting financial damage than Cuba (see above), it’s also a much nicer place for a vacation. And no country — even Cuba — has packed more drama into the last half-century; British Empire, independence, dictatorship, communist revolution, bloody ultra-communist counterrevolution, US invasion and now democracy. You’ve got to love it.

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