Will Israel Target Iranian Nuclear Facilities in "Retaliation"?

Iran's missile attack on Israel on April 13th spooked financial markets. This attack was the result of Israel bombing the Iranian Embassy in Syria on April 1st. Judging from the response of Israeli Prime Minister Benjamin Netanyahu, who convened a war cabinet meeting for the second time in less than 24 hours after the attack, there was a high probability that Israel would strike back. For a moment, the Iranian-Israeli conflict showed great signs of escalation. And Iran launched retaliatory air strikes against Israel, turning the main conflict in the Middle East from the previous "Israel and Hamas" to "Iran and Israel".

Since Israel bombed the Iranian Embassy in Syria on April 1st, the world has been waiting for Iran's reaction, and when and by what means Iran will retaliate. As the period between March 11th and April 10th is the Iranian month of Ramadan, Iran has to delay action to avoid violating the rules.

The Eid al-Fitr starts after April 10th. The Iranian religious leader Ali Khamenei said that the "Zionist attack on the Iranian diplomatic embassy is a major mistake, and they should be punished for their actions". It means that Iran will fight back.

The same day, Israeli Prime Minister Benjamin Netanyahu responded to Iran's speech, warning that "whoever harms us, we will harm them". Surely, the counterattack will be implemented directly if Iran fights back.

Now, Iran has "made its move". According to the attitude of Israel's previous statements and recent actions, a counterattack is inevitable. At present, Israel is likely to launch an attack on Iran's hinterland. On Friday, it was reported that the Israel Defense Forces and Mossad have approved the counterattack on the core of the Iranian hinterland if Israel is attacked by Iran, which is included in a battle plan.

But another question is why Israel bombed the Iranian embassy in Syria. This was not even a mistaken bombing, but a blatant bombing. Why? There is an interesting point of view that Israel's real purpose is to induce Iran to retaliate, and then Israel will destroy Iran's nuclear facilities in the name of counter-retaliation.

In the Middle East, the only country that is capable of creating an existential crisis for Israel is Iran. Iran has nuclear facilities that may develop into nuclear weapons. Thus, as Israel possesses nuclear weapons, those non-nuclear Arab countries won't be threats. And if "there is no way back" for Israel, nuclear weapons will be used. Therefore, Iran is the only country that can cause a substantial threat.

If Israel "destroys" Iran's nuclear facilities under the name of anti-retaliation, Israel will have long-term security and its status will also be enhanced.

From this point of view, it is almost inevitable that Israel will strike back after the weekend's attack. This in turn begs the question, how would Iran retaliate if its nuclear facilities were attacked?

Since Israel possesses nuclear weapons, an "all-out war" by Iran is probably only a secondary option. The first option would be to blockade the Strait of Hormuz, as the Houthis have done. As the Houthis are "regional proxies" backed by Iran, Iran can certainly copy their moves, and the blockade may be even stronger. Accordingly, Iran may then announce that only cruise ships from friendly countries will be allowed to pass through.

Iran's control of the Strait of Hormuz, through which about one-third of the world's crude oil is shipped to the world, is a disguised threat to the United States and the West. Because it will greatly increase the cost of crude oil in these countries, and from the point of view of the current de-inflation process in these countries, this will lead to considerable trouble or even oil wars.

According to Russian estimates, if the Strait of Hormuz is blocked by Iran, global oil prices will immediately soar to more than $400 per barrel. In this way, the inflation in Europe, the United States, and Japan will collapse, and the global financial markets will oscillate tremendously.

In other words, if Iran starts blocking the Strait of Hormuz, it will be a serious escalation of the war conflict, which will lead to two huge problems.

One is that a large amount of global hedge funds will surely flock to the U.S. bond futures market. In this market, there is a basis difference arbitrage trading hedge funds (using the price difference between the U.S. bond spot and U.S. bond futures arbitrage), the size of about 0.8 - 1 trillion U.S. dollars between them in the U.S. bond futures market is bearish. And because the U.S. debt futures liquidity is better with leverage, the price of U.S. debt futures will be boosted once a large number of hedge funds into the U.S. debt futures market to buy U.S. debt futures. Therefore, the price difference between the U.S. debt spot and U.S. debt futures will decline sharply, or will even "reverse", which will turn the hedge fund's profit into a loss! Finally, hedge funds will be forced to sell U.S. debt spots to "stop loss". This will trigger a chain reaction, leading to more hedge funds to accelerate selling. Moreover, the selling treasury bonds value may reach hundreds of billions in a couple of hours, which may trigger restrictions or suspension, also known as "credit market freezes".

A "freeze" in the credit market would mean a simultaneous loss of liquidity in all financial markets, including the money market and the stock market. The impact would be incalculable (such signs were shown in September 2019 and March 2020).

The Fed may then massively expand the balance sheet, i.e. QE, and cut interest rates sharply at the same time, to save the markets.

The other problem is that if Iran does block the Strait of Hormuz, it will have a serious impact on inflation in all countries. The logic chain is very simple, the increase in the cost of crude oil transportation (detour) leads to an increase in the price of crude oil, which in turn leads to an increase in energy inflation, and finally affects overall inflation. After that, a series of chain reactions will be triggered, such as a rise in gold, the long bond in the U.S. debt appearing to plummet, and even a second banking crisis. If inflation rebounds badly or even reverses, the Fed may be forced to raise interest rates again to control inflation. The original policy path is disrupted, market expectations are subverted, and there will be a huge oscillation in the entire financial market.

Therefore, no matter how the Iranian-Israeli situation is, as long as Israel does not bomb Iran's nuclear facilities, the impact on the global financial markets is still under control. And once Israel bombs Iran's nuclear facilities, the "chaos" will arrive. So, we should pay special attention to the conflict between Israel and Iran. We need to closely watch how Israel will fight back.