Trump is cornered and trying to find a way out
Across areas such as AI, credit spreads, and private credit, a great deal is happening. However, at present, the war in the Middle East is by far the most important driver for financial markets. The key focal point is the Strait of Hormuz. This is understandable, as it has been effectively closed by Iran for several weeks, while under normal circumstances roughly 20% of global oil and gas consumption flows through this route. For helium and fertilizers, the share is even higher (helium is essential for semiconductor manufacturing).
As a result, prices for these commodities have risen significantly in recent weeks. So far, however, not to an extent that has fully disrupted the global economy. This situation should not be extrapolated too far forward, as substantial inventories were initially available and are currently being drawn down.
In the coming weeks these inventories are likely to be depleted if the Strait of Hormuz remains closed. Prices will not only continue to rise, but physical shortages are also expected to emerge. This dynamic is reinforced by consumers attempting to secure future supply by building up inventories. As a result, higher prices are not yet leading to a meaningful reduction in demand.
If the Strait of Hormuz remains closed, a global economic crisis is likely to begin relatively quickly. Under normal circumstances, such developments unfold more gradually. However, the current environment is characterized by highly valued assets—particularly equities and real estate—combined with elevated levels of debt. This creates the potential for a rapid domino effect. Rising inflation leads to higher interest rates and slowing economic growth. Subsequently, credit spreads widen and equity markets decline. This reduces the value of collateral underlying many loans, leading to a contraction in credit availability and further economic slowdown. Stress in private debt markets amplifies these dynamics.
In such a scenario, policymakers would typically respond with aggressive monetary and fiscal stimulus. However, rising inflation limits the scope for monetary easing. At the same time, fiscal space is constrained, as government debt levels and deficits are already elevated. Further fiscal expansion could push up long-term interest rates, offsetting much of the intended stimulus.
For Trump, the most straightforward option would therefore be to bring the conflict to an end quickly by withdrawing U.S. involvement. In that case, the Strait of Hormuz would likely reopen relatively soon. However, this would imply that the U.S. has achieved virtually none of its strategic objectives. The regime in Tehran would remain in place, and it remains uncertain whether Iran’s nuclear ambitions could be effectively curtailed. While Iran has been militarily weakened, Russia appears willing to supply advanced weaponry and support. Moreover, Russia has a clear incentive to help Iran sustain disruptions in the Strait of Hormuz, as elevated oil prices directly benefit the Russian economy—potentially with negative consequences for Ukraine.
This situation highlights a structural asymmetry: while the U.S. maintains overwhelming military superiority, Iran effectively controls what could be described as an “economic nuclear weapon” through its ability to disrupt the Strait of Hormuz. A U.S. withdrawal would likely embolden Iran to deploy this leverage again in the future. In addition, such a move would significantly damage U.S. credibility and Trump’s political standing, creating the perception of a strategic defeat. As a result, this option appears unlikely.
This leaves Trump with the need to pursue a strategy aimed at either achieving a form of regime change or reopening the Strait of Hormuz—potentially through military force. Both options are highly complex, even with allied support, and would likely require substantial deployment of ground forces. This runs counter to prior political commitments and could carry significant electoral costs, yet may represent the least unfavorable path forward.
There remains a possibility that the conflict could be resolved through negotiations. However, such a process would likely be time-consuming—during which the global economy would already suffer considerable damage. Furthermore, Iran has limited incentive to engage constructively given its current leverage.
Our conclusion is that the U.S. is in the process of deploying additional military resources to the region and is likely to take further action within the coming weeks. As a result, prices for oil, gas, helium, and fertilizers are expected to remain elevated for an extended period, if not rise further. Physical shortages are also likely to materialize. This presents a challenging outlook for asset prices.
Our latest Global Financial Markets Report provides further detail on these developments.
