The past few days have shifted the character of the conflict in Iran, once again. Salman Ahmed, Global Head of Macro and Strategic Asset Allocation at Fidelity International, says the questions around how this conflict will be resolved and at what cost, remain critical.
What started to look like an off-ramp coming into frame (post the Trump reversal last Monday, and the extension of the threat to blow Iranian power plants to 5th April) is now moving towards a messier – though increasingly telegraphed – escalation phase.
1. Negotiations stalling, escalation becoming more likely
Mediation efforts, particularly those led by Pakistan and supported by regional actors, appear to have stalled in momentum.
At the same time, the conflict is broadening. Houthi missile activity against Israel reinforces the risk of regional spillovers, even as key chokepoints such as Bab el-Mandeb remain operational (for now).
US signalling remains inconsistent. Messaging oscillates between negotiations and escalation, leaving limited clarity on the immediate intended pathway.
At the same time, the deployment of marines into theatre introduces clear risks of escalation.
The operational objective remains unclear, but discussion has centred on two possibilities: intervention linked to the extraction of enriched uranium assets or action targeting Kharg Island.
Of the two, a move on enriched uranium facilities appears more likely. Targeting Kharg would risk opening a more direct and expansive front, with immediate implications for energy flows.
Even so, any form of US boots on the ground would represent a material escalation. The critical variables would be scope, duration and clarity of end-state.
2. Scenario Shift: Into telegraphed escalation rather than widespread energy infrastructure destruction across Iran and the Gulf
We now assess that the conflict has moved beyond the boundaries of Scenario 2 (as described here) into a phase better characterised as telegraphed escalation.
This is not totally uncontrolled or chaotic escalation. It is signalled and, to some extent, managed with mis-calculation risks attached.
The absence of widespread infrastructure destruction in the communication of both sides suggests restraint remains in place.
Tail risks have risen relative to our last calibration, but they are different from what was the case last weekend. At the same time, escalation and resolution are no longer mutually exclusive.
The most likely path in our view is one in which further escalation is used to force a resolution outcome, even if that outcome is incomplete, messy or unstable.
3. The Strait and the “day after”
The Strait of Hormuz remains effectively contested. Traffic continues at a snail’s pace, but under constrained and uncertain conditions determined by Iran (for example, Pakistan negotiated 20 tankers to pass through the Strait which was characterised by President Trump as a “gift”).
Even in a resolution scenario, it is unlikely that Iran relinquishes this leverage entirely especially given how degraded their miliary capability is now following sustained US/Israeli bombardment.
A more plausible outcome is that the Strait reopens on Iran’s terms, potentially with forms of implicit or explicit control/pricing overflows.
That could include informal tolling, selective disruption, or persistent threat premia. Reports suggests that western military planners don’t see any military solution (barring regime change in Iran) to get the Strait unconditionally opened.
This matters because the majority of flows through the Strait are destined for Asia, with China the largest end consumer.
The economic burden of disruption therefore falls disproportionately on Asian economies rather than the US, which is also visible in relative market pricing.
The “day after” is unlikely to resemble the pre-conflict status quo. The security architecture of Gulf energy flows has shifted somewhat structurally.
4. Energy and macro: persistence over collapse
We continue to work with a Brent assumption of around $85 for the remainder of the year. This reflects a persistent geopolitical premium beyond the immediate resolution of the war.
A rapid normalisation of oil prices into the $40–50 range (talked in some quarters) would require a clean resolution, internationally integrated Iran and a consequent collapse in risk premia.
Given the complexity of the current environment, that outcome appears extremely optimistic to our minds.
At the same time, while the physical energy markets are under severe strain, we are not yet in a scenario of sustained, large-scale supply loss as that would require widespread energy infrastructure damage and a complete shutdown of the Strait through mining (or so on) to take place.
5. Asia at the epicentre
The economic transmission is increasingly centred in Asia, followed by Europe.
Policy responses across the region have been swift and pragmatic. Governments have deployed a mix of price caps, subsidies, export controls, and strategic reserve releases to limit pass-through into domestic fuel prices.
In more vulnerable economies, demand-side measures are emerging, including energy rationing and behavioural adjustments.
These interventions are, for now, containing the immediate inflationary impact. However, if elevated energy prices persist, the burden shifts.
Fiscal capacity is not unlimited, and central banks may be forced to turn less dovish over time.
Longer term, this episode reinforces the case for diversification. Renewables, nuclear and, in some cases, a return to coal are likely to feature more prominently in policy discussions and planning as chokepoint risks become central to assessments.
6. Market signals: Asia stress, policy response building
Asian equities continue to underperform, with the MSCI Asia Pacific index declining sharply over the past week and continued downward pressure as we start this week.
Currency pressure is evident, particularly in oil-sensitive economies such as India and Thailand.
Policy responses are intensifying. The Reserve Bank of India has moved to cap open currency positions in an effort to stabilise the rupee.
In Japan, authorities have escalated verbal intervention as yen weakness raises inflation concerns, with the central bank leaning more vigilant.
Bond markets have been less directional after focussing on inflation last week and now beginning to balance growth concerns against inflation risks.
7. External actors and endgame complexity
China’s views are becoming more visible. Its engagement with Pakistan’s mediation efforts introduces another layer of great power dynamics into the conflict.
Given China’s exposure to Gulf energy flows, it has a strong incentive to support stabilisation as despite heavy energy buffers it is exposed to the risk of a global recession.
Any additional developments here will be important to watch given the country’s strategic relationship with Iran.
Bottom Line
We are moving into a phase of somewhat telegraphed yet dramatic escalation with a higher probability of a messy resolution.
Tail risks have increased in a different way compared to last weekend, but so too has the incentive for all parties to contain the conflict given the scale and breadth of disruption.
The likely outcome is not a clean end, but a negotiated messy resolution that leaves underlying tensions unresolved and Iran with continued leverage over the Strait in our view.
Energy markets are unlikely to revert quickly to pre-conflict pricing. Some permanent geopolitical premium is now embedded in energy markets in our view, and the burden of adjustment is falling most heavily on gulf energy-dependent Asia followed by Europe.
The US remains more insulated but higher prices in the energy space are a macro factor which will impact growth, inflation, and policy outcomes.
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