How will the evolving situation in Iran affect the US stock market, gold, and crude oil? A comprehensive guide

Cailian Press, February 28 (Editor: Xiao Xiang)
In recent weeks, escalating tensions between the U.S. and Iran have once again prompted traders to outline potential regional developments based on risk sentiment and volatility. The latest news on Saturday reports an explosion in downtown Tehran, the Iranian capital. Israel’s Defense Minister stated that Israel has launched a preventive strike against Iran.

In response, well-known macro strategist Michael Ball also analyzed the evolution of the Iran situation by referencing historical precedents.

Ball pointed out that if the U.S. takes military action against Iran, it could trigger sudden risk-averse market reactions, but this sentiment might still turn into trading opportunities. Such negative market sentiment would only persist long-term if there is substantial disruption to oil production and shipping around the Strait of Hormuz.

Ball said the key issues now are twofold: (1) whether the U.S. aims to accelerate negotiations or overthrow Iran’s leadership; (2) whether any military strike will be described as a single action or the start of a series of campaigns.

Ball first considers a scenario where the U.S. conducts limited strikes on Iran and adopts a conciliatory stance afterward, meaning there would be no sustained disruption to regional oil production or transit through the Strait of Hormuz.

Relevant historical precedents include: the January 2020 U.S. drone strike that killed Iranian military commander Soleimani, Israel’s large-scale airstrikes during “Operation Rising Lion” last year, and the U.S. “Midnight Hammer” operation targeting Iran’s nuclear facilities.

In these cases, the typical market reaction pattern is: a strong risk-averse impulse in the first 1-3 days—oil, gold, and the VIX spike, and stock markets come under pressure. But if regional shipping remains smooth, volatility quickly narrows, and as oil prices eliminate event risk premiums, equities tend to recover.

As shown in the chart below, these market dynamics are consistent with the response after Soleimani’s airstrike.

Regarding “Operation Rising Lion” and “Midnight Hammer,” the typical market response actually tends to occur about a week before the initial strike—markets anticipate the action. And after the first strike occurs, markets often reverse within a day: gold and oil prices fall on “buy the rumor, sell the fact,” while U.S. stocks rebound after the attack.

On the impact on inflation expectations, a study by the Dallas Fed on the “Midnight Hammer” operation indicates that even under severe disruptions related to the Strait of Hormuz, the initial spike in oil prices is less important than the sustained price increase.

However, Ball also notes that if U.S. military actions aim to overthrow Iran’s leadership, it would trigger sustained risk aversion and increased cross-asset volatility. Regime change is rarely a single event; instead, it’s likely a lengthy process involving comprehensive reassessment of governance, security, and oil policies. Even in so-called orderly transitions, market sentiment would only recover once investors are confident that future oil supplies are relatively stable.

In chaotic adjustments or prolonged conflicts, oil prices tend to become more structurally volatile because tail risks are assigned higher probabilities—not just due to supply losses causing spot prices to rise. Since inflation data will be affected by rising energy prices—even if long-term expectations are not fully unanchored—this will complicate the stance of global central banks.

One example is the “Iraq War” that began in March 2003 and lasted for eight years. During the initial phase, oil volatility spiked; only after regime change stabilized and global oil markets adjusted (including the start of the U.S. shale revolution) did prices return to stability.

Therefore, Ball concludes that when considering the latest U.S.-Iran tensions and their market impact, the key focus will be on the trajectory of escalation—initial strikes may already reveal this.

If the U.S. conducts “pre-emptive” strikes on military facilities and Tehran responds proportionally, it suggests negotiations could still restart, and volatility might subside; but any major strike against Iran’s leadership would imply a longer period of uncertainty, keeping oil prices and volatility elevated.