Iran controls the strait! Can the war still come to an end?

NANHUA FUTURES

joined discussion ·

US-Iran-Israel Hot War Erupts: Who Is in the Game? Where Is the Market Headed?

On February 28, 2026, the United States and Israel jointly launched military strikes against Iran under the codenames 'Epic Wrath Operation' and 'Lion's Roar Operation,' respectively. Iran immediately retaliated with missile attacks, escalating the Middle East situation into a direct hot war. As of 12:25 PM on March 1, the conflict reached a decisive turning point: Iranian media reported that Supreme Leader Khamenei was killed in the airstrike. Following the news, Iran's official stance quickly turned extremely hardline, explicitly stating high-intensity retaliation against the US and Israel for 'avenging Khamenei.' They even proclaimed an 'unlimited, no red lines' response and listed American military bases in the Middle East and Israel proper as legitimate targets, pushing the situation to the brink of losing control. However, diverging sharply from the risk-averse pattern at the onset of the conflict, the market has not fully priced in the risk of a full-scale escalation of the conflict. Instead, it reflects a unique trading expectation: the market seems to be betting that after Khamenei’s death, a more moderate regime, more willing to compromise with the West, will emerge in Iran, thereby cooling down the conflict. Some market participants have even noticed a celebratory atmosphere within Iran that contradicts the official hardline statements, further reinforcing the narrative logic of a 'policy shift after regime change.' Two key variables need close attention going forward: first, the power transition and factional rivalry results among Iran’s new leadership; second, whether the US and Israel will use this window to further pressure or push for regime change. If extreme hardliners dominate the power transition, the market’s 'moderate regime' expectation may be disproven, leading to a repricing of geopolitical risks; conversely, if moderates smoothly take over power and restart negotiations, the current market trading logic might be validated.

Based on this, this article will provide a comprehensive macro interpretation of the US-Iran-Israel conflict from multiple dimensions including the origin of the conflict, its core essence, strategic objectives of all parties involved, regional chain reactions, financial and economic impacts, and war scenario projections, combined with the evolution of Iran's foreign policy trajectory.

I. Origin of the Conflict: Thirty Years of Nuclear Negotiations and the 2026 Hot War Trigger

We believe that this joint US-Israel strike against Iran represents the culmination of decades of development in the Iranian nuclear issue and the proxy wars and economic shadow conflicts in the Middle East following the termination of the ten-year nuclear agreement. The background and core triggers can be summarized in three main aspects:

1.The End of the Nuclear Agreement and Proliferation Concerns:The 2015 nuclear agreement, which lasted for ten years and officially ended in October 2025, had restricted Iran’s uranium enrichment activities in exchange for lifting international sanctions. Iran rapidly advanced its nuclear development process, with uranium enrichment purity far exceeding civilian nuclear fuel standards and approaching weapons-grade thresholds.

2.Iran's domestic political and economic turmoil:Due to long-term international sanctions and regional conflicts, Iran's domestic currency, the rial, has continued to depreciate, with high inflation significantly increasing living pressures. By late 2025 to early 2026, protests related to livelihood issues erupted in Tehran and other areas. After the protests escalated, the Iranian government’s response measures further intensified domestic tensions. The U.S. viewed the situation inside Iran as a strategic opportunity to exert pressure on the country.

3.The protracted confrontation among the U.S., Israel, and Iran escalates:Since 2023, the regional confrontation between Iran, Israel, and the U.S. has gradually escalated, evolving from proxy frictions toward direct military confrontations. In 2024, Israel conducted an open military strike on targets within Iran. In 2025, large-scale military conflict broke out between Iran and Israel, with the U.S. military providing intelligence support to Israel. By February 2026, the U.S. and Israel completed large-scale military deployments in the Middle East. The originally planned U.S.-Iran technical negotiations in Vienna, scheduled for March 2, were forcibly interrupted due to regional military actions. The U.S. and Israel leaned toward addressing their differences with Iran through military deterrence.

It is evident that the core demands of both sides in this military action are very clear: the U.S.-Israel coalition aims to destroy Iran's nuclear facilities, air defense systems, and national security framework through preemptive airstrikes, even seeking to promote regime change in Iran; Iran's core demand is to defend national sovereignty and the stability of the current regime, forcing the U.S. and Israel to pay an unbearable military and political cost through missile counterattacks and proxy armed resistance.

II. The essence of the conflict and the timing of U.S. actions: dual calculations of geopolitical hegemony and domestic politics

(1) The core essence of this U.S.-Iran conflict

We believe that this conflict is by no means a simple nuclear issue dispute but rather the result of overlapping core logics outlined below:

First, the U.S.'s strategic need to maintain its geopolitical hegemony in the Middle East and curb Iran's regional rise;

Second, the political calculations of Trump's administration ahead of the 2026 domestic elections;

Third, Israel’s preventive strikes against Iran’s nuclear threat and proxy armed groups, based on national security bottom lines.

From a geopolitical perspective, Iran, as the core of the Middle East's Shia bloc, has built a 'Shia crescent' by supporting proxy forces such as the Houthis and Hezbollah in Lebanon, continuously challenging US geopolitical dominance in the Middle East and Israel’s national security red lines. From a nuclear safety standpoint, Iran’s rapid advances in nuclear technology pose a security threat to both the US and Israel. Domestically in the US, Trump's administration may have launched this military operation to gain political leverage for the midterm elections, attempting to consolidate core voter support through a low-cost military victory.

(2) Key reasons for the US decision to launch a military operation at this time

1. The political window of the 2026 election:The Trump administration’s core objective now is to win the 2026 midterm elections. It believes that a 'successful action against Iran,' especially one that promotes regime change in Iran, could maximize domestic conservative voter support, becoming its key political capital for the election.

2. Turmoil inside Iran creates an opportunity:Since December 2025, nationwide protests have erupted in Iran, highlighting economic and social tensions. The Trump administration views this as an opportune moment to exert maximum pressure on Iran and push for regime change.

3. Buffer conditions in energy markets mature:Gulf oil producers like Saudi Arabia and the UAE have already increased crude oil production and export levels, creating a buffer for potential oil supply disruptions, which can reduce the impact of a sharp spike in oil prices on the US economy.

4. Strategic gaps in international society:While China, Russia, and Europe are calling for de-escalation, they have yet to form a unified intervention stance or binding mechanism, allowing the US to exploit this gap and initiate unilateral military action.

III. Strategic Objectives of the US, Israel, and Iran: The Core of a Mutually Beneficial Game

(1) The United States: Regime Change as the Core, with Multiple Geopolitical Goals

The Trump administration set regime change in Iran as the core strategic goal of this military operation; secondly, to completely eliminate Iran's nuclear threat by destroying its nuclear facilities and missile development systems; thirdly, to dismantle Iran’s proxy armed networks and eliminate its regional influence in the Middle East; and finally, to consolidate America’s geopolitical dominance in the Middle East through military victory, maintaining the dominant position of the petrodollar system. At the same time, Trump explicitly demanded avoiding significant US military casualties, attempting to reduce operational risks and control war costs through military strikes to achieve strategic pressure on Iran.

This demand also echoes concerns within the US military. Chairman of the Joint Chiefs of Staff, Kane, has clearly warned that if the operation drags on, it will not only rapidly deplete the US military’s inventory of precision-guided munitions but will also inevitably lead to casualties, eventually trapping the US military in another prolonged Middle Eastern conflict. Moreover, the core force currently deployed by the US, the USS Gerald R. Ford Carrier Strike Group, has been continuously stationed for over eight months, pushing personnel and equipment to their limits, further restricting the US military’s capacity for long-term operations.

(2) Israel: National Security as the Top Priority, Eliminating Direct Threats

Israel's core objective is to completely eliminate Iran’s nuclear threat and military deterrence. As a country in direct confrontation with Iran, Israel has always regarded Iran as its biggest national security risk; secondly, to weaken Iran’s proxy forces in the Middle East, especially Hezbollah in Lebanon and Hamas, eliminating their missile threats to Israel’s mainland; ultimately, through joint operations with the US, to solidify Israel’s absolute military advantage in the Middle East, forming strategic deterrence against neighboring countries and deterring them from taking military action against Israel. Some hardline factions within Israel tend to completely eliminate Iran’s long-term threats, which has become an important underlying risk for escalating conflicts.

(3) Iran: Safeguarding the Regime as the Bottom Line, Combining Countermeasures and Strategic Games

Iran’s core strategic objective is to safeguard the stability of the current regime and national sovereignty, making the US and Israel aware of the cost of military strikes through missile counterattacks and proxy armed resistance, thereby abandoning any intention of regime change; secondly, to hold onto the sovereign bottom line of nuclear development, refusing to accept America’s coercive “denuclearization” demands; again, to maintain its regional influence in the Middle East by supporting proxy forces, causing the conflict to overflow and forcing the US and Israel into multi-front combat dilemmas; and ultimately, to promote conflict de-escalation through diplomatic mediation and international support, avoiding full-scale war.

In terms of its own endowments, Iran’s land area is about four times that of Iraq, with a complete independent industrial system, a population size and strategic depth far exceeding those of previous US adversaries in the Middle East, and highly dispersed military targets, demonstrating strong resilience and anti-strike capability. From a historical perspective, since World War II, the US has never completely crushed a country of Iran’s scale through military means. The Vietnam War, Afghanistan War, and Iraq War all ended with the US military mired in long-term quagmires, becoming the core confidence for Iran to resist US-Israeli military strikes.

IV. Macroeconomic Transmission Effects

We believe that the impact of this round of conflict on the macroeconomy hinges on the performance of international oil prices, potentially transmitted through the chain of 'energy prices → inflation levels → economic growth → monetary policy.' The historical lessons from the two oil crises provide a key reference for the Fed’s policy decisions. Specifically:

The impact of Iran's situation on the Fed’s monetary policy largely depends on the magnitude and duration of the rise in oil prices. Combining the historical lessons from the two oil crises with the current market environment, we conclude that the Fed’s monetary policy will most likely exhibit the core characteristics of 'maintaining a wait-and-see stance, delaying rate cuts but not shifting to rate hikes.' The main logic is divided into three points:

1. Key historical lessons from the two oil crises:1) During the first oil crisis, the Fed attempted to address both inflation and recession simultaneously, and its decision to cut interest rates ultimately led the U.S. economy into 'stagflation'; 2) During the second oil crisis, then-Fed Chairman Volcker successfully tamed inflation through aggressive interest rate hikes, demonstrating the critical importance of maintaining 'stable inflation expectations.' These two lessons have led the Fed to form a clear consensus: monetary policy cannot simultaneously tackle both inflation and recession pressures; a clear choice must be made after weighing risks.

2. There is no strong basis for a significant increase in oil prices at present:Unlike during the two oil crises, Iran’s share of global crude oil production is relatively low today, and the likelihood of Iran fully blockading the Strait of Hormuz is extremely slim. Global crude oil supplies are unlikely to experience substantial disruption, so oil prices may not have a solid foundation for sustained large increases.

3. The Fed’s final policy decision:This round of conflict will most likely delay the pace of the Fed’s interest rate cuts in 2026, but it will not reverse the easing direction or lead to a shift toward an interest rate hike cycle. Based on statements by Fed officials, their primary goal is to stabilize inflation expectations and promote economic growth. Specifically, if oil prices exceed $100 per barrel and remain elevated for more than three months, there may be marginal adjustments to the monetary policy path. However, judging from the current situation, the overall framework of monetary policy is unlikely to undergo fundamental changes. Meanwhile, the Fed will strengthen inflation expectation management to prevent rising oil prices from triggering unanchored inflation expectations.

In addition to the transmission chain between energy prices and monetary policy, the conflict will also directly impact global supply chains. The Red Sea-Suez Canal route accounts for 12% of global maritime trade. If the Houthis follow through on previous threats to restart attacks on Red Sea shipping, it would drastically reduce the efficiency of channel passage, cause shipping costs and marine insurance fees to soar significantly, disrupt the global Asia-Europe shipping supply chain, increase logistics costs and delivery times, and further amplify downward pressure on the global economy.

Five: Analysis of the trajectory of the U.S.-Iran-Israel conflict (with AI assistance): Four variables determine outcomes, four scenarios define the endgame.

As of 12:25 PM Beijing Time on March 1, through AI, we conducted the following scenario analysis of the event:

(1) The four core variables determining the course of the conflict

We believe that every step of escalation and de-escalation in this conflict is determined by the dynamic changes of four core variables, which together form the underlying logic of the conflict’s trajectory and serve as the premise for all scenario analyses.

1. Iran's 'intensity red line' for retaliation – the core trigger for conflict escalation

There are two non-negotiable red lines for Iran’s retaliation; once crossed, the conflict will inevitably enter an irreversible escalation phase, representing the biggest suspense in the current situation:

The first red line is large-scale US military casualties. Trump's core objective in military action is to gain political leverage for elections, with a bottom line of 'avoiding significant US military casualties.' If Iran’s missile retaliation results in multiple US fatalities, Trump would be pressured by domestic hawks to expand the scope of strikes, escalating the conflict from surgical strikes to full-scale airstrikes.

The second red line is the substantial blockade of the Strait of Hormuz. This strait carries one-third of global oil trade transportation, and any blockade would directly sever the global oil supply chain. The US and Israel would likely justify a full-scale war against Iran, potentially including ground invasion, under the pretext of 'ensuring global shipping safety.'

2. The 'contraction elasticity' of US-Israel strategic goals – the core precondition for a ceasefire

Trump has openly stated 'regime change in Iran' as his core strategic goal, but constraints such as US military ammunition stockpiles dictate inevitable contraction pressures, which form the key precondition for any short-term ceasefire.

3. Iran's 'regime cohesion' – the fundamental support for whether the conflict could become prolonged

The core calculation of the US in this operation is high-intensity airstrikes combined with internal disintegration, attempting to escalate domestic contradictions in Iran through military strikes, inciting public uprisings and military mutiny, thereby achieving regime change within Iran. The cohesion of Iran's domestic regime is the key to breaking this calculation and also the fundamental support for whether the conflict could extend into a prolonged period.

4. The 'common interest' of international mediation — the only external lever for de-escalation

Direct confrontation between the US, Israel, and Iran has almost no room for negotiation or trust; third-party mediation is the only feasible path to de-escalation. The success of mediation hinges on whether a common interest acceptable to all parties can be found.

(II) Four scenario analyses of conflict progression

Based on the different evolution directions of the four core variables mentioned above, we believe:

Escalation scenario (spiral confrontation, medium-term stalemate): Iran blockades the strait, heavy civilian casualties occur, and the US-Israel continues airstrikes. Both sides fall into an 'airstrike-retaliation' loop, reaching a long-term ceasefire under international pressure after 1-2 months.

Baseline scenario (quick resolution): If verified US casualties are minor, the US-Israel may complete tactical objectives within a week, potentially reaching a temporary agreement by mid-to-late March with 'lifting the blockade in exchange for a ceasefire.'

Out-of-control scenario (full-scale war): If US military casualties exceed one hundred or if the US-Israel launches a ground invasion, it will trigger a full-scale war in the Middle East.

Reversal scenario (internal collapse): Unexpected regime change in Iran, with a low probability.

(III) Key time window

March 1-3: The critical period of the first wave of airstrikes, with three key points to observe: First, whether the intensity of US-Israeli airstrikes continues to escalate and whether the strikes expand to Iranian civilian infrastructure; second, the final intensity of Iran's first wave of retaliatory counterattacks, verification of US casualties, whether two core escalation thresholds are breached, and whether a full-scale jihad mobilization order is issued; third, the preliminary results of Iran's leadership transition, whether a unified new leadership core is formed, and whether signs of domestic division appear. If the intensity of US-Israeli airstrikes decreases by March 3, verified US casualties are minor, and Iran does not breach escalation thresholds, there is still a small probability of the conflict moving towards a baseline ceasefire scenario. If airstrikes continue to escalate and Iran’s retaliation crosses red lines, the conflict will inevitably escalate, potentially spiraling out of control.

March 3-5: The golden window for mediation, with three key points to observe: First, whether US-Israeli officials adjust strategic goals and formally signal readiness for negotiations, clarifying plans post "one-week strike"; second, whether Iran’s new leadership expresses any willingness to cease fire via intermediaries like Oman or Qatar and whether retaliatory actions gradually decrease in intensity; third, whether proxy forces such as the Houthis and Hezbollah further escalate operations, opening up a second front. If both sides release positive signals within this 72-hour period, a ceasefire negotiation remains possible; if both sides remain firm and reject negotiations, the likelihood of conflict escalation will stay above 80%.

March 7-15: The make-or-break period for ceasefire negotiations, with three key points to observe: First, whether mediators like Oman and Qatar push for formal face-to-face negotiations between the parties and the progress of mediation; second, whether the US, Iran, and Israel reach consensus on core ceasefire terms, particularly follow-up inspections regarding Iran’s nuclear program, sanctions relief arrangements, and passage through the Strait of Hormuz; third, political reactions within the US, including whether Trump promotes existing tactical achievements as core election successes and abandons further escalation. If no formal ceasefire agreement is reached during this window, the probability of prolonged conflict will sharply increase.

March 20: Persian New Year. If hostilities persist, the conflict will likely become protracted. Three key points to observe: First, anti-US revenge sentiment and regime cohesion domestically in Iran during the New Year, and whether a nationwide total war mobilization is completed; second, whether the US and Israel pause airstrikes during the New Year to extend diplomatic goodwill; third, whether Iran announces a complete withdrawal from the Nuclear Non-Proliferation Treaty and initiates full-scale weapons-grade uranium enrichment. If the conflict extends into Persian New Year without a ceasefire, it indicates that the baseline ceasefire path is entirely closed, leading to a mid-term stalemate or even a long-term full-scale war.

(IV) Black Swan and Grey Rhino Events That Cannot Be Ignored

The core premise of the conflict analysis assumes rational decision-making by all parties, but the Middle East situation has always been rife with uncertainties. Based on real-time developments, adjusting the priority of black swan and grey rhino events, any occurrence of the following unexpected events would completely overturn the trajectory of the conflict, potentially triggering significant global repercussions.

Black Swan 1 (Highest Priority): Official confirmation of hundreds of US military casualties. This represents the most urgent risk point—once triggered, Trump will abandon the 'restraint' strategy, forced to expand the scope of strikes, directly escalating the conflict into uncontrollable scenarios with no middle ground.

Black Swan 2 (Secondary Priority): Iran officially announces the blockade of the Strait of Hormuz. Handling one-third of global oil trade, an official blockade would completely sever the global oil supply chain, compelling the US and Israel to launch a full-scale war, escalating the conflict into an uncontrollable scenario.

Grey Rhino 1 (High Priority): Collapse of the global energy supply chain, prompting emergency intervention by Western economies. Should Iran block the strait or US military casualties exceed hundreds, this event could easily be triggered, further exacerbating the global economic crisis.

Grey Rhino 2 (Secondary Priority): Israel unilaterally expands the conflict and launches a ground invasion. Netanyahu’s government faces immense pressure from domestic far-right factions, but currently shows no signs of ground deployment, making this unlikely in the short term. However, should Iran’s retaliation result in mass Israeli civilian casualties, this risk will significantly rise.

We believe that the greatest risk of this conflict always stems from strategic miscalculation. If airstrikes by the US and Israel exceed Iran's survival threshold, or if Iran’s retaliation surpasses America's political tolerance, it could lead to an unintentional escalation of the conflict within a cycle of strikes and counterstrikes. Should the conflict cross red lines and evolve into a full-scale war, it would not only trigger a global oil crisis and economic stagflation, but also completely upend the geopolitical landscape of the Middle East, leaving an irreversible and profound impact on the global political and economic order.

Risk Warning: Some military scenarios are AI-generated and for reference only.

Investment advisory business qualification: CSRC Permit [2011] No. 1290

Author: Assistant Director of the Nanhua Research Institute Zhou Ji Z0017101

34K Views