US attack on Iranian nuclear facilities

The escalation spiral in the Middle East continues. During the night from Saturday to Sunday, US fighter jets and submarines attacked three important nuclear facilities in Iran: Fordow, Natanz and Isfahan. Iran’s response and the development of crude oil prices will be decisive for the impact of this event on the global economy and financial markets.

Threat

Israel and Iran are not natural enemies, as the two countries do not share a border. However, it is Iranian state doctrine to destroy the State of Israel. The International Atomic Energy Agency (IAEA) estimates that Iran already has 400 kilograms of highly enriched uranium with a purity of 60%. It is only a small step from there to the 90% purity required for weapons.

Outbreak of war

Last year, mutual missile strikes between Iran and Israel marked a new level of escalation. However, the exchange of blows was short-lived. The next intensification took place on the night of 12 to 13 June. At that time, Israel began bombing nuclear facilities, missile launch bases and military installations, and killing high-ranking military personnel and scientists. Israel’s stated goal is to eliminate the existential threat posed by Iran. Since then, Israel and Iran have been exchanging rocket fire.

However, Israel’s military capacity is too limited to cause significant damage to Iran’s nuclear facilities and delay the development of nuclear bombs, at least for a considerable period of time. The alternative of regime change through bombing is also not particularly promising. This raises the question of how long the conflict will last and how it might end. Will Iran destroy its missile launch bases before Israel’s missile defence systems can be deployed? If victory for either side is unrealistic, when will negotiations resume?

Operation Midnight Hammer

Last week, indications of US involvement intensified. The US military may have the GBU-57 Massive Ordnance Penetrator (MOP) heavy bomb at its disposal to destroy or at least significantly weaken Iran’s nuclear programme. The US attack on three Iranian nuclear facilities on the night of 22 June was large-scale and targeted. Three nuclear facilities (Fordow, Natanz and Isfahan) were to be destroyed. More than 125 military aircraft were involved, including B-2 bombers, which deployed the bunker-busting GBU-57 MOP bomb. According to the Pentagon, the US is not seeking war, but will respond if US citizens, partners or interests are threatened. Iran has the opportunity to negotiate.

Negotiations

If the US attack was indeed successful, a de-escalation will take place in a positive scenario:

1. Israel abandons its goal of regime change through bombing because the nuclear programme has been eliminated or weakened sufficiently.
2. The US’s willingness to go to war is being curbed by the isolationist MAGA (Make America Great Again) movement. In addition, the risk of recession would increase in the event of a significant rise in oil prices.
3. Continued bombing of Iran with US involvement would probably not bring about regime change, but would severely weaken the country economically. Iran would also face the threat of becoming a failed state (ungovernable).
4. The neighbouring Arab states have no interest in this, nor in an attack on oil infrastructure facilities in the region.

Iran could therefore signal its willingness to negotiate and refrain from retaliatory strikes. This scenario would be positive for risky asset classes such as equities and negative for the oil price (which would fall).

Retaliation

However, a military response by Iran to the US attack is considered highly likely. The question is how strong it will be. If it is only minor, a spiral of escalation could be avoided. However, a major attack on a US military base (Iraq, Qatar, Bahrain), on oil infrastructure in neighbouring Arab countries or on the Strait of Hormuz could draw the US into a war with Iran. Although escalation does not seem rational, it is certainly realistic. This means that the risk of a further rise in oil prices has increased. As a general rule, the higher the rise in oil prices, the greater the resulting loss of purchasing power and the higher the risk for economic growth and the stock markets.

Positioning

Our current base scenario is that negotiations will take place, leading to a de-escalation of the conflict. We therefore do not intend to adjust our slightly defensive positioning for the time being. This expectation is also reflected in current market prices. At the start of the trading week, futures contracts on European and US stock markets are only slightly down, meaning that the stock markets are likely to start the week with only slight losses. Yields on credit-secure government bonds are also little changed at the start of trading. Although the price of oil (Brent crude) rose sharply overnight, the market quickly calmed down again.

 

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