The next five days will be critical in the Iran war, says Allianz's Mohamed El-Erian

Summary

• Markets violently reversed from risk-off to risk-on due to potential de-escalation in Iran war tensions, after being positioned for further escalation.
• Critical uncertainty: Talks must involve Israel, as three warring parties (U.S., Iran, Israel) have misaligned objectives, making an off-ramp complex.
• Economic damage has already occurred: Qatar announced 17% of LNG production taken out for years, missing fertilizer planting seasons, and GCC fund flows may reduce by $800 billion over four years due to domestic investment needs.
• Oil price volatility highlights extreme headline risk, with prices swinging from 98 to 87 based on geopolitical developments, making near-term forecasts unreliable.
• The next five days are crucial for negotiations, but asymmetrical wars are hard to end, with risks of Iranian field commanders acting independently outside central control.
• Market has not fully priced in long-term economic and financial implications of structural damage, such as infrastructure repairs and reduced capital flows.
• U.S. is the only party that can declare victory; imposing its will could interrupt a shift from disruptions to structural damage.
• Risk remains that Israel does not follow U.S. lead, or that Iranian central command cannot control field commanders with preexisting orders for opportunistic targets.