Deutsche Bank Global Macro and Thematic Research Head Jim Reid discusses the impact of tensions between Israel and Iran on equity markets and what a potential closure of the Strait of Hormuz could mean for oil prices.

Tehran

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Iran Strikes

Jim Reid, head of Global Macro and Thematic Research at Deutsche Bank, outlined the potential consequences for equity markets should the Strait of Hormuz close due to escalating tensions involving Iran. He stated that such a closure could push oil prices toward $120 per barrel, significantly impacting equities with a sharp initial decline followed by a potential recovery, though the disruption could be more severe and prolonged than past incidents.

Reid also noted that, historically, the threshold for a major market sell-off is currently higher, as investors are somewhat underweight in US equities. This technical positioning may provide some support, but a major event like the closure of the Strait would likely be required to trigger a significant market downturn.

What happens to equities if the Strait of Hormuz Closes?

how would the equity markets react to that? What is still seen as the worst case scenario for many, looking at the conflict right now, would be Iran's attempts to close the Strait of Hormuz, which so far they have not attempted to do. Oh, if that, if the Strait of Hormuz got closed, then our guys think oil will go to 120, or head to that direction depending on how long that the Strait was closed, etc. And that would be a negative, a big negative for the equity market. You would still think that it would be resolved at some point and you would have the same kind of playbook of a sharp fall and then a sharp recovery, but it would probably be bigger and it would take longer. So that that is the real escalation that would cause this event to be a big factor in the summer. And you say as well in your latest note that dropped this morning that the bar for a more significant sell-off is higher this time. So you give us that historical context, which was really important and useful, but the bar is higher right now for more significant drawdowns. Why is that? Well, I think on our analysis, I think the market is still a little bit short on US equities, or underweight. So I think that probably means that you probably do need a bigger event. Not saying it's not going to happen, but I think the technicals are probably a little bit more supportive than they could be at this point.

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What happens to equities if the Strait of Hormuz Closes?

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