Israel-Iran military conflict views and takeaways

Summary

Middle East tensions have escalated following Iran's strike on Israel this past weekend; however, we continue to believe a broader regional conflict is not imminent. In this report, we offer takeaways and perspective from the latest escalation, and also highlight that our global economic, monetary policy, and financial market outlook has not changed as a result of the most recent geopolitical developments in the Middle East.

Israel-Iran military conflict views and takeaways

Iran's retaliatory strike on Israel is an escalation of Middle East tensions, but not necessarily a pre-cursor to broader regional conflict. Events over the past few weeks in the Middle East, more specifically this past weekend, reinforce that the global geopolitical landscape remains tense and that finding a steady state in the Israel-Hamas war remains elusive. As far as significance, Iran's aerial assault marks the first attack on Israel launched directly from Iranian territory as opposed to the use of foreign proxies. Also, even while retaliatory in nature, military strikes directly from Iran and not through international proxies represents an escalation in the Israel-Hamas war. This escalation brings the Middle East closer to full-scale regional military confrontation, a conflict that could ultimately draw in the United States given its strategic alignment with Israel. With that said, while Iran's retaliatory strike on Israel is notable, in our view, recent hostilities do not necessarily mean a broader regional military conflict is now imminent. Iranian retaliation was seemingly transparent and telegraphed in advance to allow Israel and Israel-aligned nations to prepare defense capabilities. To that point, almost all Iranian drones and missile strikes were intercepted by Israel and allied defense partners before hitting Israeli territory. Those that got through defense systems caused no material infrastructure damage and inflicted no casualties. Also, some solace can be found in the fact Iran targeted Israeli military sites and not civilian centers nor U.S. military assets. Targeting civilian populations or U.S. military sites would likely have prompted an intense Israeli Defense Force and/or the United States military response. These characteristics of the Iranian attack lead us to believe Iran's retaliation was more symbolic and a face-saving technique rather than an explicit attempt to inflict maximum damage on Israel.

The next stages of the conflict are uncertain, but will be guided by Israel's response. Given our assessment of Iran's attack on Israel, we continue to believe military conflict will remain contained and not expand into Tehran or the broader Middle East on a sustained basis. We say “sustained basis” in that temporary flare-up's similar to the latest escalation could be repeated, but ultimately we do not believe Iran nor Israel are actively seeking a wider scale conflict or confrontation with each other. However, we do not have an excess degree of conviction in the future direction of the conflict and sentiments could change rapidly. We may get clarity in the near future as Israel's war cabinet, formed in October 2023 to dictate the war against Hamas, is currently discussing response options. As of now, no decision has been made as the three-member war cabinet is seemingly divided on whether to respond with a degree of restraint and signal no need for escalation, or react more forcefully and seek targets inside Iran's borders. In the event Israel does choose to react with a show of force, the Israeli Defense Force (IDF) could target government, military and/or civilian targets. The worst case scenario would likely involve IDF preemptive strikes on Iran's nuclear facilities as well as civilian populations in addition to stepping up hostilities against Iranian proxies and immediately expanding its military offensive into Rafah. Before any decision is made, Israel will likely try to be swayed toward deescalation by international diplomacy efforts. Diplomatic attempts at deescalation are already underway as the United Nations Security Council called an emergency meeting to communicate a need for restraint from all stakeholders. While the UN Security Council is likely to gather frequently to discuss deescalation options, any messaging or official communications are symbolic and not legally binding. In fact, any UN Security Council attempt to release a joint statement or resolution condemning Iran or Israel would likely be vetoed by Russia and China, permanent UN Security Council voting members and allies of Iran, or the United States, also a permanent voting member and Israel ally. Institutional diplomacy is likely to continue, but ultimately may not have significant influence over how Israel decides to proceed as Netanyahu's government must continue to be perceived as committed to war efforts in the Middle East and limiting any future aggressions from Iran. In that sense, back channel talks and bilateral negotiations between governments may be the most effective approach at achieving deescalation.

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