World markets prepare for consequences of tension in the Middle East

The war between Israel and Hamas has sharpened attention on growing geopolitical risks to financial markets, as investors wait to see if the conflict attracts other countries with the potential to drive up commodity prices even further. Petroleum and deal a new blow to the World economy.

Israeli Prime Minister Benjamin Netanyahu promised on Sunday “demolish Hamas”, as his army prepared ground operations in Gaza to root out the militant group, whose deadly assault on Israeli border towns shocked the nation.

Crude oil prices skyrocketed almost 6% on Friday, as investors discounted the possibility of a broader conflict in the Middle East. The first indicator of reaction to the weekend’s events will likely come when oil begins trading in Asia late on Sunday.

“It appears we are headed for a massive ground invasion of Gaza and large-scale loss of life,” said Ben Cahill of the Energy Security and Climate Change Program at the Center for Strategic and International Studies (CSIS). “Any time there is a conflict of this scale, there will be a market reaction.”

The market reaction in the last week has been relatively muted, although the Israeli currency, the shekel, took a heavy hit.

“I have no idea if the markets will continue to perform relatively well”said Erik Nielsen of UniCredit. “It almost certainly depends on whether this latest conflict remains localized or escalates into a broader war in the Middle East.”

The S&P 500 index fell 0.5% on Friday. Safe haven assets registered purchases, with a rise more than 3% of gold and the dollar at one-week highs.

According to Bernard Baumohl of The Economic Outlook Group in Princeton, New Jersey, an expanding conflict would likely lead to a further acceleration of inflation and, as a byproduct, interest rates around the world.

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

“Rates could go down”said. “Hopefully the dollar will strengthen.”

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

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

“If the war of Ukraine “He taught us something, it is not to underestimate the effect of geopolitics,” Nomura’s George Moran said on the bank’s weekly podcast.

Other energy markets could be affected, as seen in recent developments such as Chevron’s discontinuation of natural gas exports through a major undersea pipeline between Israel and Egypt.

Analysts say rising oil prices are unlikely to have a significant impact on U.S. gas prices or consumer spending.

However, Cresset Capital’s Jack Ablin said the situation deserves follow-up.

“If oil production is suddenly cut off or transportation is interrupted, it will create problems not only for economies, but also for markets”he claimed.

Crude oil, oil company stocks and commodities in general, and gold in particular, could serve as an effective hedge for investors, he added.

Source: Reuters