🥛 What does the war mean for markets? 🌎️

GM. This is Milk Road Macro, the newsletter that explains why a 21-mile chokepoint can move your gas bill, your inflation expectations, and your portfolio in the same day.

Here’s what we’ve got for you today:

✍️ Everything you need to know about the Iran war and what it means for markets.
🎙️ The Milk Road Macro Show: U.S.-Israel Strike on Iran: What It Means for Global Markets & Oil Prices w/ Keith McCullough.
🍪 U.S. manufacturing expanded steadily in February.

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Prices as of 10:00 a.m. ET.

EVERYTHING YOU NEED TO KNOW ABOUT THE IRAN WAR AND WHAT IT MEANS FOR MARKETS

The U.S. and Iran are at war.

Strikes are ongoing across the Middle East.

The U.S. and Israel are attacking Iran.

While Iran is lashing out at locations across the region.

This conflict is shaking global markets, and particularly energy markets.

So what’s the latest?

What might happen next?

What will happen to energy markets?

And what will happen to risk asset markets?

Let’s take a look…

So what’s the latest?

On Saturday, the U.S., alongside Israel, began Operation Epic Fury.

This included a large number of strikes across Iran.

Iran’s Supreme Leader, Ali Khamenei, was killed during the opening strikes.

Iran then launched a wave of missiles/drones at Israel, U.S. regional sites, and other Gulf nations - targeting energy infrastructure in particular.

At the time of writing, six American military personnel had died.

The U.S. State Department urged Americans to leave countries in the Middle East, citing “serious safety risks”.

This call came hours before two drones struck near the U.S. Embassy in Riyadh, Saudi Arabia.

What might happen next?

There are several questions up in the air, including:

How long will the war last?

Defense Secretary Pete Hegseth has described the campaign as “laser-focused” and not an “endless war”.

On Saturday, Senator Tom Cotton said the U.S. operation might take “weeks, not days”.

On Monday, President Trump said: “We haven't even started hitting them hard. The big wave hasn't even happened. The big one is coming soon.”

Speculators on Polymarket think the war will last several weeks.

At the time of writing, Polymarket odds suggest a 46% chance of a ceasefire by March 31.

Source: Polymarket

Are Iran’s retaliation attempts successful at inflicting damage?

There has been relatively limited “damage” from Iranian responses.

The vast majority of Iranian missiles and drones are being intercepted.

But there has been relatively high disruption - with Iranian strikes partly targeting energy infrastructure across the Middle East, causing some very large energy sites to close.

Is there any real chance of American “boots on the ground”?

This has not been categorically denied as a future option by the top U.S. officials.

Defense Secretary Pete Hegseth was asked, “Are there currently any American boots on the ground in Iran?”

He answered “No” - but immediately added that the U.S. is not going to spell out what it “will or will not do”.

President Trump has been quoted as saying he won’t rule out sending U.S. ground troops “if necessary”.

According to expert analysis from think tanks like RAND and the Army War College, assembling and deploying a 500,000-strong U.S. ground force capable of a large-scale invasion of Iran would likely require 6 to 12 months of preparation.

What does it mean for energy markets?

Crude oil has popped higher since the war began.

The Gulf area of the Middle East is the single biggest concentration of hydrocarbons anywhere in the world - and includes four of the five largest oil fields in the world.

But, so far, market developments have been relatively tame.

Crude oil prices sit at roughly the same level as throughout most of 2023 and 2024.

Source: TradingView

The problem here is that crude oil has a big impact on inflation levels in the U.S. and across the world, and the price of crude oil can pass through to official inflation metrics quickly.

WTI Crude oil is heavily correlated to the U.S. CPI.

Source: TradingView

Crude oil edging above $80 or $90 a barrel would be a big and global problem.

And the biggest risk here is the Strait of Hormuz.

Will it be “closed” - and, crucially, how long might it be “closed” for?

Source: Mapbox

The Strait of Hormuz is a tiny sea passage measuring just 21 miles (34 kilometers) wide at its narrowest point.

It’s known as one of the most critical chokepoints in global trade.

Tankers haul roughly 20 million barrels of crude a day - about a fifth of the world’s daily output - through the waterway, with a large chunk of it heading to China.

Source: Goldman Sachs

Iran attacked some vessels in the Strait of Hormuz over the weekend, with movement through the waterway slowing to a trickle.

But the passageway wasn’t “officially closed” until Monday, when Iran’s Revolutionary Guard Commander declared the route “closed”, vowing to set fire to any ship attempting to pass through.

But can Iran actually “close” the Strait?

Oil expert Fereidun Fesharaki told Bloomberg TV that any attempt by the Islamic Revolutionary Guard Corps to choke off the Strait of Hormuz using warships, drones, and missiles would likely be short-lived.

He said:

"It's just a fear factor. The Revolutionary Guard Navy is a minor force compared with what the American Navy, the British, and the French can bring in."

So, is the Strait actually “closed” right now?

Effectively, it is.

Hundreds of tankers are anchored/queued on either side of the passageway, with the route essentially too dangerous to cross.

Some smaller vessels are passing through, and some larger vessels are taking the risk - but the vast majority of vessels are not.

Goldman Sachs estimates point to a $10-15 dollar per barrel boost to the “fair value” price of crude oil in the event of a one-month closure, not including any further “risk premium” pricing.

Source: Goldman Sachs

The longer this Iranian-declared “closure” of the Strait continues, the larger the risk for higher crude oil prices.

The biggest question is: how many days of storage are available before serious energy market disruption begins?

In a note, JP Morgan's commodity expert Natasha Kaneva wrote:

"Gulf producers could likely sustain production for no more than 25 days under a full Hormuz disruption. Beyond this point, storage constraints would force mandatory production shut-ins."

This means that if vessel passage through Hormuz is restricted for four weeks, this could drive “shut-ins of output” and support global oil prices heading towards $100 per barrel, according to JP Morgan.

However, it’s possible that the U.S. and other nations can take measures to mitigate any closure, and "to restart traffic, the U.S. Treasury could provide insurance guarantees for ships transiting the Strait - a step it has taken in past crises”, according to JP Morgan.

While crude oil is probably the most important global commodity, the impact of the conflict could prove much greater for natural gas prices.

There have been bigger moves in natural gas markets.

QatarEnergy, the world’s largest natural gas company responsible for a fifth of the world’s LNG supply, was targeted by Iranian drones, forcing it to shut down production.

This has triggered sharp movements in some natural gas markets.

In particular, it’s a big problem for Europe, which is heavily reliant on Qatari gas.

Europe’s gas benchmark - TTF - has risen more than 90% in a week.

Source: TradingView

This is leading to elevated inflation and growth concerns in certain parts of the world - particularly Europe.

But there are also secondary consequences of a closure of the Strait of Hormuz beyond crude oil and natural gas.

For example, 34% of the world’s fertilizer supply passes through the waterway.

So, a prolonged closure of the Strait could potentially have big implications for global food production.

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EVERYTHING YOU NEED TO KNOW ABOUT THE IRAN WAR AND WHAT IT MEANS FOR MARKETS (P2)

What does it mean for risk asset markets?

History suggests that the S&P 500 historically behaves consistently during military conflicts - an initial gap down when conflict begins, generally bottoming within days, and generally recovering in full within a matter of weeks.

Here’s a list of all major geopolitical events since 1940 - alongside forward S&P 500 returns.

Source: Carson Investment Group

On average, the S&P 500 was higher 66.7% of the time three months after the event began.

The three-month average “hit rate” for the S&P 500 for any time in history is 68.8% - so there’s little historical difference between major geopolitical events and “normal times” on a medium-term timeframe.

If we look at historical short-term S&P 500 performance specifically after air strikes in the Middle East region, the S&P 500 had risen 81% of the time six days after the first strike.

Source: Turning Point Market Research

However, the most important question is: how much of the war disruption was already priced in?

The whole world saw the U.S. military build-up in the Middle East for weeks before the war began, so the recent developments are not entirely a surprise for markets.

In a note, Carson Investment Group wrote:

“We believe the market has already been pricing in the possibility of a conflict for a month, which may limit the size of a further move and may cause a quicker rebound when the market sees a likely path to resolution.”

Carson points to energy as the top-performing U.S. sector in 2026, other “defensive sectors” of the U.S. market (staples, utilities) performing well in recent weeks, crude oil prices already climbing since the start of the year, and bond yields already falling meaningfully through February (flight to safety).

So, it’s very possible that market pricing “got ahead” of this war in a meaningful way.

Wrapping up

The war is spilling over into a regional conflict - and there’s no certainty over how long it will last.

However, it’s currently looking like “weeks”, at least.

The war is having a big impact on energy prices - and the outlook from here for energy largely depends on what happens with the Strait of Hormuz, and whether vessels can pass through.

For risk asset markets, history suggests that any negative impacts will be short-lived - and a lot of the negative effects may have already been “priced in”.

U.S.-ISRAEL STRIKE SHOCKWAVES 🛢️

In today’s episode, we sat down with Keith McCullough at Hedgeye to talk about the US/Israel strike on Iran and how markets tend to price in headline shocks, especially across oil, gold, and risk assets.

Here’s what you will hear:

Why markets often “front run” narratives, and what that means for the first wave of volatility.
A clear breakdown of Hedgeye’s GIP model and the four macro “quads,” including Quad 3 stagflation signals.
Oil, the Strait of Hormuz risk, and why Keith focuses on buying meaningful dips while the breakout holds.
How Hedgeye uses daily retrained risk ranges to trade bonds, metals, crypto, and equities based on signals, not stories.

Hit play and see for yourself 👇️