Israel and Iran: Fear of escalation grips risk markets

Recent reports of an Israeli aerial bombardment targeting a key nuclear facility in central Isfahan have sparked a significant shift out of risk assets and into safe-haven investments. It is now clear that the escalating shadow warfare between Israel and Iran, running alongside the Gaza conflict, has finally ignited the powder keg in the Middle East, and we have moved decisively out of the shadows and into the glaring light of open conflict.

It should be noted that this is not a staged response to an Iranian drone attack but rather an indication that we have entered a new phase of this conflict, one that is likely to have significant and far-reaching consequences for Middle East peace and least of all risk markets. Suppose the reports are accurate and Israel indeed launched a barrage of missiles at Iran's top nuclear facility. In that case, it is a clear sign that tensions will continue to rise and possibly beyond a tit-for-tat manner.

According to the Times, Iran went to extraordinary lengths to convey both its obligation to respond to the Israeli strike against the Iranian diplomatic mission in Syria and its sincerity in averting a regional war.

The strategy was clear: If Iran took steps to ensure the vast majority of its drones and missiles would be intercepted, and if the IRGC stated unequivocally that the theocracy had no plans to attack Israel further, the US would be incentivized to talk Israel out of additional escalations. The IRGC not only knew the US would help Israel shoot down the barrage, which was apparently part of the plan, but clearly, Israel is paying little heed to US de-escalation demand, and now the fear of escalation spiralling out of control grips risk markets.