Global markets were sent scrambling earlier this month after news broke out that the Palestinian militant group, Hamas, had launched thousands of rockets in a surprise attack on Israel. The attack, which was met with a swift and forceful response from the Israeli military, has sparked immediate concerns about an escalation in violence in the region. The two sides have been at odds for years, but the recent events have reignited tensions, raising questions about the stability of the region and its potential effects on the global economy. The conflict, fueled by long-standing political and religious tensions between Israel and Palestine, has once again put a spotlight on the fragile geopolitical landscape in the Middle East.
As the death toll continues to climb amid the rapidly intensifying violence in the region, governments and investors around the world are closely monitoring the situation, with many fearing potential spillover effects on global markets. The Israeli-Hamas conflict has highlighted the interconnectedness of global markets and the ripple effects that a major conflict in one corner of the world can have on economies and financial systems around the globe. With both sides showing no signs of backing down, and with the possibility of other countries getting involved, the situation remains highly unpredictable, leaving many investors on edge. So, what does the ongoing Israeli-Hamas war mean for global markets and investors? Let’s take a closer look.
Impact on Crude Prices
While the conflict’s impact on crude oil prices has been relatively modest so far, with only a slight rise in prices, experts warn of potential price spikes if the conflict continues to escalate. The Middle East is home to some of the world’s largest oil producers, and any disruption in production or transportation could have significant effects on global oil markets. Already high oil prices could rise even further if the conflict “escalates into a broader regional conflict involving Iran’s proxy armed groups,” warned Hamza Meddeb, director of the political economy program at the Malcolm H. Kerr Carnegie Middle East Center.
According to Bloomberg Economics, the extent of the impact on oil prices will depend on the spread of the conflict and its duration. If the conflict remains confined to Israel and the Palestinian territories, with no significant spillover effects on neighboring countries, the impact on oil prices may be limited – although still worrisome for countries heavily reliant on oil imports. Bloomberg estimates that a conflict confined to Gaza could result in a $4 rise in oil prices, a modest yet notable increase when considering the vulnerable state of the global economy.
A second scenario, where the conflict spills over to Lebanon and Syria, could see oil prices rise by as much as $10 per barrel, says Bloomberg. Iran-backed groups in both countries have already exchanged fire with Israel in the past, raising concerns about a potential proxy war between Iran and Israel. Such an outcome could cause significant disruptions to oil production and transportation in the region, sending oil prices soaring and putting additional stress on the global economy. In 2006, during the Israel-Hezbollah conflict, oil prices rose by nearly 10% as tensions escalated. If the current conflict follows a similar path, crude oil prices could jump to $94 per barrel, creating a 0.3% drag on global GDP growth, according to Bloomberg.
And in the worst-case scenario of a direct war between regional enemies Israel and Iran, Bloomberg warns that oil prices could skyrocket by up to $150 per barrel — a record high that could tip the global economy into recession. While this may seem like an unlikely scenario, the unpredictability of the situation and the potential involvement of other parties make it a possibility that can’t be ignored. In such a scenario, models point to global growth being cut by 1% while inflation could rise 6.7%, says Bloomberg. During the 1973 Oil Crisis, when Arab oil-producing countries imposed an embargo on Western nations supporting Israel, oil prices quadrupled in less than a year, leading to years of stagflation that took a heavy toll on the global economy. While the current situation is not yet on the same scale, it serves as a reminder of the impact that geopolitical events in the Middle East can have on energy markets and economies around the world.
With so many moving parts and no clear path to de-escalation, the fallout of the Israeli-Hamas conflict on oil prices and its subsequent effects on global markets remains a major concern for investors and governments alike. But it’s not just oil prices that are at stake.
Geopolitical Risks and Investor Sentiment
Aside from its potential effects on oil prices, the Israeli-Hamas conflict has also highlighted the geopolitical risks and uncertainties present in the region. The Middle East is already a volatile region, with ongoing conflicts, political tensions, and economic struggles. With the current situation adding another layer of instability, investors are becoming increasingly risk-averse, leading to a capital flight from the region and putting additional pressure on already struggling economies. In the first week after the attack, iShares MSCI Israel exchange-traded fund, which tracks Israeli stocks, hit a 52-week low as investors pulled out $5 million from Israeli stocks. With US funds holding over $43 billion in Israeli equities and bonds, any further escalation in the conflict could lead to significant losses for investors with exposure to Israeli markets.
The potential for further intensification and involvement from other parties also raises concerns about the stability of the region as a whole. If the conflict were to spread beyond Israel and the Palestinian territories, neighboring countries — many of which are already facing their own political and economic challenges — could become embroiled in the conflict, leading to a further destabilization of the region. With Israel’s close relationships with major global powers such as the United States, any escalation of the conflict could lead to increased involvement and potential retaliation from other countries, including Russia and China. Given the pair’s already strained relationships with the US and other Western powers amid ongoing sanctions, such a situation could have far-reaching consequences for global stability and investor sentiment.
In light of the escalating Israeli-Hamas conflict, billionaire investor and co-founder of Bridgewater Associates, Ray Dalio, recently warned of the potential for a full-scale world war. “It appears to me that the odds of transitioning from the contained conflicts to a more uncontained hot world war that includes the major powers have risen from about 35 percent to about 50 percent over the last two years,” he said. With China and Russia in ideological and economic competition with the US, and the Middle East serving as a potential battleground for these tensions, an escalation of the Israeli-Hamas conflict could serve as a spark for a much larger and more dangerous conflict. Given the potential for the two largest economies in the world to become embroiled in such a scenario, the impact to global supply chains, trade, and investment could be catastrophic. As JPMorgan Chase CEO Jamie Dimon presciently noted, “now may be the most dangerous time the world has seen in decades.”
The Fed’s Already Difficult Balancing Act May Get Harder
Beyond the risks to global markets and economies, the Israeli-Hamas conflict also poses a challenge for the US Federal Reserve, as it navigates its ongoing efforts to balance inflation and economic recovery. With the conflict potentially leading to a surge in oil prices and inflation, the Fed may be forced to take more aggressive measures to control rising prices, leading to an increase in interest rates, say some experts. “The Fed has had a period over the last year where it probably thought it was achieving what it needed to in order to reduce inflation and have a softer landing,” said Randal Stephenson, head of investment banking at FE International. ” But if the conflict were to spread “that could cause a rise in oil prices and that would be inflationary and would affect what the Fed is trying to do,” he added.
With the Fed already struggling to balance the competing priorities of controlling inflation and supporting economic recovery, an escalation in the Israeli-Hamas conflict could further complicate their efforts. However, given that inflation has begun reaccelerating in recent months, the Fed may have to take decisive action regardless of the situation in the Middle East. As the conflict continues to unfold and the window of opportunity to avert its spread narrows, the Fed may have to make some tough decisions in the coming months. With economists already expecting at least one interest rate increase by the end of 2023, the potential impact of the Israeli-Hamas conflict on inflation and the economy may only serve to accelerate those expectations.
Bullion May Shine Brighter
As savers seek refuge from the volatility and uncertainty caused by the Israeli-Hamas conflict, gold prices have surged by more than $100 a troy ounce, hitting their highest level since mid-July. With inflation expectations rising and the potential for greater market volatility, savers are increasingly turning to the safety of gold, leading to a sharp increase in demand for the precious metal. “Gold is holding up well because we still have a lot of uncertainty related to the Middle East and the potential for that to evolve into something very serious,” said Ole Hansen of Saxo Bank. Hansen’s assessment has been echoed by dozens of analysts, who believe that gold could continue to see strong demand as the Israeli-Hamas conflict continues, with the potential to break through all-time highs.
With the situation in the Middle East showing no signs of improving, experts say gold may continue to shine as a safe haven asset for savers seeking stability amid market turbulence. And given its long-standing reputation as a hedge against inflation, gold may see even greater demand as inflation concerns continue to rise amid fears of a potential world war. Whether or not the Israeli-Hamas conflict leads to wider instability in the region and beyond, it’s clear that the impact of this ongoing conflict will be likely felt in global markets for some time to come. As investors and analysts continue to monitor the situation closely, one thing appears certain: the potential consequences of this conflict are far-reaching and have undoubtedly added another layer of complexity to an already challenging economic landscape.
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