US targets regime change in iran

The US broke off negotiations with Iran and together with Israel launched a series of massive strikes against Iran with the aim of decapitating the regime, neturalising air defences and naval assets, and laying the groundwork to enable a popular uprising against a degraded regime.

The US targets regime change in Iran

Iran’s retaliatory strikes

For the Iranian regime, this is an existential threat and Iran has launched a series of missile and drone attacks not only against Israel, but also against regional US allies in the Gulf and beyond which host US and allied naval and air force infrastructure: Jordan, Kuwait, Bahrain, Saudi Arabia, the UAE and the RAF base in Cyprus.

Continued escalation

This widening of the conflict (with a Sunni/Shia subtext) is the broadening escalation that was feared as it 1) creates an open-ended scenario, 2) is existential leading to Iran to take high-risk/maximalist impact actions, and 3) there is growing risk of unintended consequences as falling debris from missile interceptions cause damage to civilian areas in non-belligerent states (like the UAE where both the civilian airport and hotels have been struck).

Closing the strait of Hormuz

As expected, Iran’s greatest leverage over the global economy is to close the strait of Hormuz to global shipping (it is continuing to allow Russian and Chinese tankers through).  This has led to a further oil price spike.

Duration of the conflict

The conflict is a tragedy for the region and its duration will determine the extent of disruption.  The longer the conflict persists, the more elevated the oil price, the greater the risk to inflation and economic growth.

Potential paths

The chart below outlines a high-level set of potential paths that the events could have potentially taken - we are currently on the worst case path with no clear timeline as to when the conflict could stop or the US objectives of regime change (without ground troops) could be achieved.  The domestic pressure remains the US mid-term elections in November 2026.  Trump had promised an end to the "forever wars" of his predecessors, but has just started one against a major adversary.

Potential impact

As outlined in our earlier article Will the US strike Iran?:

Near-term: direct Energy exposure as part of a diversified assets mix has helped act as a form of portfolio insurance, particularly now that Gold so volatile it is behaving more a risk asset than a protection assets at the moment.
 
Medium-term: Should conflict arise, the risk to the strait increases and – depending on the duration of any disruption – this could require a reassessment of assumption on global growth.
The US-Iran proxy war has been fought for years.  If it turned “hot,” it would force a reappraisal of energy shock risk and related inflation assumptions.

In the meantime, we continue to hope for a return to negotiations, under pressure on the US from Gulf states.