Geopolitical Signals: At a Crossroads: US politics, Gulf conflict and Macro outlook – where does it go from here?

Inflexion point

We have three interlocking issues which are running simultaneously: the conflict in the Gulf, a fracturing transatlantic alliance, and macro markets that are still pricing in a resolution to all of that which might be further away than they think. The dilemma for the United States is evident: President Trump has the leverage, but he doesn't yet have the off-ramp. Diplomacy is in a stalemate. This double blockade could be sustained for some time.

Some of the key points to watch in the coming weeks.

• A Simmering Conflict appears to be the most likely outcome from here, but there continues to be a real risk of escalation. The potential of a "good enough" deal for the US and Iran also cannot be ruled out as the clock counts down, notwithstanding it is unlikely to be good for the Gulf.
• Supported by a resilient US economy, Trump is not yet under pressure from his base and can sell almost any outcome.
• The real risk is miscalculation by both key protagonists. Iran believes the US economy cannot sustain the war, while the US believes the Iranian leadership cannot sustain the economic pain.
• The conflict serves as a reminder of the vulnerability of other global chokepoints. As the Strait of Hormuz remains subject to a defacto double blockade, the economic vulnerabilities or the opportunities for leverage that states and proxies can exert via key trade chokepoints such as Bab el‑Mandeb or the Strait of Malacca should be watched closely.
• Strained alliances. Trump’s frustration over Europe’s refusal to help secure Hormuz raises questions about a deeper rift, with the July Ankara NATO summit likely to be difficult for European allies.

For businesses navigating this uncertainty, the upcoming US-China summit in mid-May, and America’s 250^th anniversary celebrations on 4th July, could be waypoints in this conflict. As the US and Israel approach elections later this year, and as Iran navigates it own political transition, the window for resolution narrows. 

Lord Sedwill, Chair of Geopolitical Advisory, Rothschild & Co

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Strait uncertainty

The Strait of Hormuz remains closed for all intents and purposes. There remains no clear resolution on this, with every couple of days seeing a range of serious incidents. Original assessments on how much of Iran’s military capability was destroyed seem over-optimistic. Iran maintains enough capability to be disruptive where it matters. It also remains determined to get recognition of their influence on Hormuz.

The regional tensions are rising. For a few weeks the Saudi-UAE tensions were more suppressed because the war was the focus. But if anything, the war has supercharged these tensions. It’s more likely than not that Gulf unity will be eroded rather than strengthened by the conflict. The UAE’s OPEC+ exit is therefore not only about oil production quotas and diverging energy strategies, but also about deeper differences over regional strategy, Iran, Israel and the role of Gulf institutions.

Emile Hokayem, Director of Regional Security and Senior Fellow for Middle East Security, The International Institute for Strategic Studies

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Transmission risk

When the Iran war started, a low/mid/high case of $60/$80/$120 framework for crude anchored expectations.  The high case was prolonged disruption to Strait of Hormuz oil flows.  Today oil’s June contract is trading above that upper band.  Since the start of the conflict, the range of potential outcomes was inevitably wide and the risk asymmetrically skewed to the upside, which has transpired. Markets have now moved decisively beyond early worst‑case scenarios as disruption in the Strait of Hormuz persists. Prices look set to remain elevated while tanker traffic is restricted, with any meaningful pullback dependent on a reopening of the Strait and a gradual 2–3 month rebalancing of flows and inventories. Arguably, the greater risk lies in supply constraints and broader supply‑chain disruption, which could have abrupt and material effects if the conflict drags on.

Stuart Joyner, Energy and Power Specialist, Rothschild & Co Securities  

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Trading through

Global trade is incredibly flexible now, a lot of adjustments were made after the pandemic, a lot of near-shoring, optimisation, and that is helping with global economic resilience. This resilience was shown during the last year’s tariffs.  There is a path to rate cuts in the US if there’s a break in the clouds in terms of underlying inflationary pressures, driven by lower tariffs. The gasoline price will likely stay elevated through to the end of the year. In that case, you have US CPI getting up to 4% by the end of the year. Where one would worry about growth or US, even global recession, is should there be an escalation and therefore significant increase in oil prices.

Supply chain pressure will also be an important indicator in trying to gauge the deep regional shock versus the global macroeconomic implications for now. If signs of de-escalation or resolution become clear by the end of June, markets will prove rational in focussing on AI growth over energy crisis risks. Tentative rate hike expectations in Europe will unwind and no severe damage will have been done to the global economy. But energy prices moving persistently higher or signs of breakage in supply chains would bring growth risks into sharp relief, risking more damage to energy and commodity importers in both developed and emerging markets (ie Japan, Eurozone, UK, India, Indonesia and others).  The US would remain relatively resilient among the developed markets.

Melissa Davies, Chief Economist, Rothschild & Co Redburn

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Different lenses and time horizons look set to entrench a simmering conflict  - one that the main protagonists can endure for so long as the political costs of resolution outweigh the costs of continuing. For business and investors, that means watching closely as the window for resolution narrows

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