Rabobank On The Iranian Attack: This Is Either Theater... Or Theater Of War

Submitted by Michael Every of Rabobank

Theatre; or Theatre of War

The day starts with news from Iranian TV, confirmed by the Pentagon, that Iran’s Revolutionary Guards Corp has fired “tens” of surface-to-surface missiles from within Iran itself at a US airbase in Iraq. US President Trump is aware of the situation and is monitoring it.

Iranian forces have not directly confronted the US like this before: previous attacks have come through proxies like militias. To attack so openly, and in defiance of US Trump’s recent warnings, and from within Iran itself, is a clear escalation that is also an act of war by any definition. For an Iranian economy in free-fall, which despite home advantage has no hope of actual military victory in a face-to-face confrontation with the States, this seems a remarkable, dramatic, and, most worryingly, illogical move.

At this stage, with news hazy and facts on the ground absent, there appear two realistic scenarios. One is that this attack is theatre to placate the large crowds who were so recently on Iran’s streets. The alternative is that Iran has genuinely decided to test Trump by also upping the ante. The only way to tell is if there are US casualties.

If we get images of dead and injured US soldiers, then the worst-case scenarios begin to open up. If no real damage has been done by these missiles, but Tehran gets to show the crowds it responded, then more positive possibilities are still available. We will find out shortly – but breaking news is that there are ‘only’ Iraqi casualties, according to its Ministry of Defence. It remains to be seen if that is a red line for Trump, or is the kind of collateral damage he was expecting after taking out former IRGC head Soleimani.

Given that this move from Iran appears totally out of keeping with their usual strategic acumen, either the loss of Soleimani has meant a total loss of talent, and/or self-control, or this is indeed a token level of revenge. I will *cautiously* stick to that interpretation for now.

However, as we go to press--and bearing in mind that much news at this stage of the fog of what might be war often proves not to be true in hindsight--Iran might have launched a second wave of attacks, Iraq announce military operation “Overwhelming Response”, and the Iranian air force has apparently been deployed and is in Iraqi airspace. Iran is also warning that if the US responds to this attack, the next wave of Iranian missiles will “destroy Dubai and Haifa” (in Israel).

Indeed, in Asia this morning we see oil up again, gold up again, USD/JPY at 107.7, AUD/USD at 0.6851, and US 10-year yields at 1.71%, down over 10bp – and all on this news, not due to a data-release.

Meanwhile, yesterday also saw China’s Global Times arguing that there is no rush for the US and China to sign a trade deal, and while underlining that it wants a deal, also implies that it does not agree to the terms set out publicly by the US side. Is this a last-minute negotiating tactic? Or is it a genuine reflection that the two sides are once again not on the same page, and that the deal will collapse, or not be complied with, or perhaps not even be signed? Again, this comes down to either theatre from China, or the US and China going back to the theatre of trade war. That should be injecting a high degree of uncertainty into markets – but Iran obviously just eclipsed them.