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The market reaction to Iran’s unprecedented strike on Israel has been contained so far, as the region’s path to an all-out war seems to be contained (so far). More than 170 drones, as well as 150 cruise and ballistic missiles, were launched on Saturday by the Islamic Republic, though 99% of the aerial threats were shot down by Israel and its allied coalition partners. “We will exact the price from Iran in the fashion and timing that is right for us,” Jerusalem declared following the attacks, while Tehran said that such an event would be met with a “decisive and much stronger response.”
Flashback: Since the Gaza war erupted on Oct. 7, 2023, Israel has been fighting Iranian proxies on multiple fronts, including Yemen’s Houthis who have disrupted shipping in the Red Sea, as well as Iranian-backed forces in Lebanon, Iraq and Syria. Iran attributed its strike on Israel as retaliation for an alleged Israeli airstrike on April 1 that killed several senior IRGC commanders in Syria, which leveled the consular building adjacent to Iran’s embassy in Damascus. Over the weekend, Iran also seized an Israeli-linked cargo ship in the Strait of Hormuz, which is a key route for the oil trade.
Israelis spent Saturday night in safe rooms and bomb shelters, while the Home Front Command instituted limitations on public gatherings and other restrictions through Sunday. Those have so far been lifted, suggesting that immediate retaliation in the form of a direct strike on Iran won’t be the clearest path of deterrence. President Biden has also vowed to continue helping Israel defend itself, but the U.S. won’t take part in a counter-offensive in a bid to prevent an all-out regional war in the Middle East. A coalition will likely be established instead to isolate Iran diplomatically, with the aim of putting the war back in the shadows.
Take the win? Some thought that the moves would shake up equities, oil, gold or shipping stocks, but it appears that investors are taking the off ramp. In fact, many of those asset classes and sectors made an unexpected U-turn as the active situation was digested, instead of the risk-on rally or selloff that might have been anticipated. More pressing to Israel is also the threat of Iran-backed Hezbollah in Lebanon, which has prevented around 100,000 of its citizens from returning home, as well as winning the war against Hamas in Gaza.
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