Following through on a campaign commitment, President Trump announced that he is withdrawing the United States from the multilateral accord that halted Iran’s nuclear program development and opened it to international verification in exchange for the lifting of economic sanctions. We will leave the analysis and commentary on the reasoning as well as the implications for regional stability to others. Our specific concern is what the implications for global public markets might be.

The most obvious place market participants are looking for a signal is in the oil market. Our view is that there will be little direct impact on the global supply-demand equation since consumption patterns are unlikely to change and most of the world can still access Iran’s output.

Where we think there is underappreciated and largely unmeasured risk is in the asymmetrical application of a sanctions regime in global fixed income and equities. Because other participants in the accord are remaining engaged and not reinstating sanctions, there is a very real risk that foreign enterprises may get tangled in the US’ reinstatement of sanctions. The Office of Foreign Asset Control (OFAC), US Dept. of the Treasury, has commenced a wind-down period after which prohibitions will return to full effect. US companies will move to comply so they do not end up crosswise with Treasury. This may marginally crimp initiatives of US companies to capitalize on the incremental (re)opening of Iran to permitted foreign trade, but seems destined to have very little impact on securities prices.

Where we see the potential for risk is in foreign companies, particularly foreign financial institutions, that would be operating entirely within the laws and sanctions programs of their countries of domicile, Germany and France for instance, and also be deemed wholly in violation of the law in the US and therefore subject to prohibitions and sanctions in the US. This could apply to banks offering services to or in Iran, and even potentially for institutions that are only indirectly involved by banking agricultural, manufacturing and other enterprises that are continuing to conduct business with Iran. A major intent of this new policy stance would seem to be forcing businesses to divest of involvement in Iran, but the asymmetry in the application of sanctions could open the markets to confusion and leave allocators of capital in the uncertain position of not knowing whether their financial entanglements fully comply with OFAC enforcement.

There are still a number of months before the sanctions relief is fully wound down and much could happen including the adoption of a new agreement before that day arrives. We do believe though that it is necessary to be extremely watchful in order to be responsive if the market begins to discount forced divestiture.