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Middle Eastern conflicts ruffle markets

The US is unlikely to start a Middle Eastern war despite this week targeting of Iran’s General Soleimani.

The US is unlikely to start a Middle Eastern war despite this week targeting of Iran’s General Soleimani.

by
John Redwood

in Features

09.01.2020

Markets thought they knew that Donald Trump would not go to war in the Middle East. He had promised that he would bring troops home and avoid entanglement in foreign wars which were easy to enter and difficult to end. We then awoke to the news that the US had killed General Soleimani of Iran whilst he was visiting Iraq.

The US argued that the use of force was legal as the general was working with proscribed terrorist groups and was the architect of various attacks on US and allied personnel. At the same time, the US-listed AAH as a terrorist grouping, which adds to the complications as they have representation in the Iraqi Parliament and argue for the withdrawal of US and allied forces from their protection role in Iraq.

Mr Trump, however, was also a critic of President Obama for being weak when faced with provocations like the use of banned chemical weapons in Middle Eastern wars. What the President decided he could do was to approve a surgical strike against a named individual thought to be central to terrorist activity against the US and allies, proving to Iran that there is a price to pay for encouraging or backing asymmetric warfare, whilst avoiding escalation and entanglement in a general war.

Proportionate?

His critics at home and abroad condemned the idea of killing a senior military and political figure from a recognised and important nation-state in the Middle East and tried to cast shadows over the US assertion of a clear legal basis for the action. The President himself threatened retaliation should Iran’s response be disproportionate which seemed to include attacks on cultural targets. The administration clarified that the US would not seek to hit targets that are protected in international law.

We have taken the view over this tense period that there will be no hot war between Iran and the US, as neither side wants one. There may be continued and sporadic terrorist actions and actions by organisations close to the Iranian state as before the death of the general, though the US clearly thinks he was a pivotal figure in such actions before. Finding as effective a successor from the Iranian point of view may not be easy. The president is focused on re-election and that implies keeping his promises not to enter a major new Middle Eastern conflict. So far, the Iranian response has by report not killed anyone. The terms of the Iranian statement are measured as they wish to claim legality for their ballistic missile attack as proportionate self-defence.

Market fears ease

Markets have been volatile but seem now to be coming to the view that a major war is likely to be averted. The oil price has risen in expectation of disruption to Middle Eastern supplies, given the past attack on Saudi oil installations by Iran and the previous seizure of an oil tanker in the Gulf. It looks this time as if the West has naval ships available to convoy oil tankers in the “at risk” region and presumably other measures have been taken to strengthen Saudi defences against future attack. There is always the danger that unwanted terrorist or military action in the Middle East could do serious damage, but the oil market is currently well supplied and prices are being kept up by restrictions on production. The US has been increasing its output substantially and stocks have been built up.

The issue of withdrawal from Iraq has just got more complicated. Coalition troops are there at the invitation of the Iraqi government to help them keep order. This is now being queried by the Iraqi Parliament at a time when the Allies wish to strengthen their positions to protect personnel and assets at risk. This will need talking through in the days ahead. It does not change the underlying view that the US will seek to avoid a major war.

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