Implications of the Israel-Hamas Conflict on Financial Markets and Geopolitical Risks

2023-10-15 11:47:50

The war between Israel and Hamas has focused the attention of financial markets on growing geopolitical risks. Investors are waiting to see if the conflict spreads to other countries, which might cause oil prices to rise once more and deal another blow to the global economy.

Israel said on Sunday it would continue to allow Gaza residents to evacuate the south, as its troops prepare to launch a ground assault on the Hamas-controlled Gaza Strip in retaliation for unprecedented attacks by the Palestinian militant group.

Oil prices jumped nearly 6% on Friday as investors priced in the possibility of broader conflict in the Middle East. The first indicator of reaction to the weekend’s events will likely be the start of Asian oil trading later on Sunday.

“It appears we are heading toward a massive ground invasion of Gaza and a large-scale loss of life,” said Ben Cahill, senior fellow of the Energy Security and Climate Change program at the Center for Strategic Studies. and international (CSIS). “Any time you have a conflict of this magnitude, you will have a market reaction.”

Market reaction over the past week has been relatively muted, although the Israeli shekel has taken a big hit.

“I don’t know if the markets will remain relatively wise,” said Erik Nielsen, chief economic adviser at UniCredit Group. “It is almost certain that it will depend on whether this latest conflict takes place or whether it escalates into a broader war in the Middle East.

The S&P 500 index fell 0.5% on Friday. Safe-haven assets saw buying, with gold rising more than 3% on Friday and the US dollar hitting its highest level in a week.

According to Bernard Baumohl, chief economist at the Economic Outlook Group in Princeton, New Jersey, an extension of the conflict would likely lead to an acceleration in inflation and, in turn, a rise in interest rates in the whole world.

However, while inflation and interest rates in other countries will likely rise in this worst-case scenario, the United States may be the exception as foreign investors pour capital into what they view as a safe haven during the global conflict, Baumohl noted.

“Interest rates might fall. “Expect the dollar to strengthen.

In Europe, economists said the bar was high for another rate hike from the European Central Bank.

The war between the Islamist group Hamas and Israel represents one of the most significant geopolitical risks for oil markets since Russia’s invasion of Ukraine last year.

“If the war in Ukraine has taught us anything, it is that we should not underestimate the effect of geopolitics,” said George Moran, European economist at Nomura, in this week’s podcast form the bank.

Other energy markets might be affected, as recent events such as Chevron’s halting of natural gas exports via a major undersea pipeline between Israel and Egypt have shown.

Rising oil prices are not expected to have a significant impact on U.S. gas prices or consumer spending, analysts noted.

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