Global markets brace for fallout as Middle East tensions rise

The recent Israeli-Hamas war has brought attention to the growing geopolitical risks that financial markets face. Investors are closely watching to see if the conflict escalates and draws in other countries, potentially driving up oil prices and impacting the global economy. As Israel’s Prime Minister Benjamin Netanyahu vows to “demolish Hamas,” the possibility of a wider Middle East conflict has caused oil prices to surge nearly 6%.

The market’s reaction to the weekend developments will be closely observed, particularly when oil trading begins in Asia. Ben Cahill, a senior fellow at the Center for Strategic and International Studies (CSIS), believes that a conflict of this scale will undoubtedly have a market reaction. While the market response has been relatively muted so far, Israel’s shekel currency has experienced a significant decline.

Erik Nielsen, group chief economics advisor at UniCredit, acknowledges the uncertainty surrounding market behavior. He suggests that the reaction will depend on whether the conflict remains localized or escalates into a broader Middle Eastern war. The S&P 500 fell 0.5% on Friday, and safe-haven assets like gold saw increased buying, with prices rising over 3% and the U.S. dollar reaching a one-week high.

If the conflict expands, it is likely to cause inflation and interest rates to rise globally. However, Bernard Baumohl, chief global economist at The Economic Outlook Group, suggests that the United States could be an exception. Foreign investors may view the U.S. as a safe haven during global conflict, leading to capital inflows and potentially lower interest rates. Baumohl predicts that the dollar will strengthen in such a scenario.

In Europe, economists believe that another rate hike from the European Central Bank is unlikely due to the heightened geopolitical risks. The ongoing war between Hamas and Israel poses one of the most significant threats to oil markets since Russia’s invasion of Ukraine last year. Nomura European economist George Moran emphasizes the importance of not underestimating the impact of geopolitics, drawing lessons from the Ukraine conflict.

The conflict has already affected energy markets, as seen with Chevron halting natural gas exports through a major subsea pipeline between Israel and Egypt. While rising oil prices may not have a significant impact on U.S. gas prices or consumer spending, analysts caution that the situation should be closely monitored. Jack Ablin, chief investment officer at Cresset Capital, highlights the potential problems that could arise if oil production or transport is disrupted. He suggests that oil, shares of oil companies, commodities, and gold could serve as effective hedges for investors.

Overall, the Israeli-Hamas war has heightened concerns about geopolitical risks in financial markets. While the market’s response has been relatively restrained, the potential for a broader conflict and its impact on oil prices and the global economy cannot be ignored. Investors are advised to stay vigilant and consider hedging strategies, with oil companies, commodities, and gold presenting potential opportunities.