Recent rhetoric and action from leaders on both sides of the conflict suggest that not only is a swift resolution unlikely, but that the war could drag on for many more weeks - Polymarket suggests a mere 50% chance of a ceasefire by the end of May. The most pressing issue for markets is the ongoing closure of the Strait of Hormuz - one of the world’s primary oil shipping routes. A prolonged closure here not only adds to the geopolitical uncertainty but could have serious inflationary implications.
Our forecasts are predicated on a scenario that assumes resolution of the conflict in the near-tomedium term. Recent rhetoric from President Trump leads us to believe that the US is seeking a relatively quick “off-ramp” so as to avoid further entanglement and limit the economic and political fallout ahead of this year’s midterm elections.
In other words, we think that Trump will want to orchestrate a controlled de-escalation and exit from Iran in a manner that can be reasonably passed off as a “win”, even if it fails to deliver on all of the war’s initial objectives, including a regime change.
Under this scenario, we would expect to see a softening in the hardline stance from both sides by mid-April - Trump’s pause to power plant strikes to 6th April suggests that this is already taking place. The Strait of Hormuz remains effectively shut, although we think there is a time limit as to how long Iran will be willing to keep up this act of strategic self-destruction. We assume a partial resumption in vessel flows through the strait in the next month or two, starting with China bound ships, with a broader re-opening to follow once an effective or formal ceasefire materialises in MayJune.
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