Trump's Iran Decision Sends Asian, European Stocks Down 1.5%

President Trump's decision on whether to bomb Iran has become a focal point for investors, as the potential conflict could have significant economic implications. With the Federal Reserve's interest rate decision already made and U.S. stock markets closed for a national holiday, attention has shifted to the geopolitical tensions in the Middle East. Stocks in Asia and Europe have seen declines, following a drop in the S&P 500 the previous day.

The human cost of global conflict is immense, and the economic repercussions are also substantial. Analysts are currently trying to estimate the potential economic impact of a conflict with Iran. President Trump has reportedly approved a plan to bomb Iran but has not yet given the final authorization for the action. The primary concern for investors is how the conflict might affect oil prices and, consequently, the strength of the U.S. dollar. These factors could influence the Federal Reserve's future decisions on interest rates.

Trump has been vocal about his desire for the Federal Reserve to lower interest rates, even going so far as to insult Fed Chair Jerome Powell on social media. He tweeted, “Too Late—Powell is the WORST. A real dummy, who’s costing America $Billions!” This public pressure adds another layer of complexity to the Fed's decision-making process.

One possible scenario is that if Trump decides to bomb Iran and the conflict leads to a prolonged disruption in oil supply, it could strengthen the dollar while weakening the global economy. Oil markets are settled in dollars, so rising oil prices would increase demand for U.S. currency. This combination of economic weakness and dollar strength could push the Fed to cut interest rates, aligning with Trump's wishes.

Analysts have noted that rising geopolitical tensions in the Middle East have already supported the greenback, with the dollar index briefly pushing above a certain level before paring gains. The true driver of the dollar's rebound is rising oil prices, which are now near a five-month high. Since most global oil trades are settled in U.S. dollars, surging crude demand tends to drive additional demand for the U.S. currency. This sentiment is also reflected in the options market, where traders have backed off from bearish dollar positions for the first time since April.

JPMorgan analysts Joseph Lupton and Bruce Kasman argued that the rise in risk premia associated with the Middle East conflict, if sustained, could fully offset the cushion provided by the oil supply increase from Saudi Arabia. This would leave a net drag on global GDP growth of 0.6% this year, concentrated in the second half. A full curtailment of Iranian oil exports could lift oil prices to near $100 per barrel and, if sustained, reduce global GDP by a full percentage point, threatening a global recession.

The Federal Reserve, as always, is waiting for more data and less uncertainty. The uncertainty surrounding a potential conflict with Iran will not help the Fed's decision-making process. Officials have demonstrated a willingness to wait for additional clarity before making any definitive moves. The Trump administration has yet to take a definitive stance on intervention in the Iran-Israel conflict, leaving the plotted course either facilitating a return to calm or potentially triggering a broader conflict that could disrupt energy markets.