Market indicators suggest the impact of the Israeli-Hamas conflict has remained contained so far, but the situation may change if Tel Aviv's ground operation in Gaza goes wrong and Iran steps in.
Last Saturday’s surprise attack by Hamas, Palestinian Islamic Jihad (PIJ), and other Gaza militants as well as Israel's retaliatory strikes have taken a toll on the economies of the region.
The shekel, Israel’s currency, has lost 3% against the US dollar, while the nation's benchmark stock index has slumped 6.4% this week. Bonds issued by Israel's neighbors – Lebanon, Jordan and Egypt – have been hit hard as well.
"The war economy always looks good in the short term as production numbers go up, but that’s at the expense of the government’s balance sheet," Tom Luongo, financial and geopolitical analyst, told Sputnik. "On the day after the attack Israel had to spend a large part of their foreign exchange reserves to defend the shekel. That will continue. Production numbers up, alongside inflation and the private economy will be diverted to the war effort if Israel follows through on the threats they’ve made to date."
Meanwhile, oil prices have gone up over fears the conflict will escalate. Late on Friday, Brent crude futures were up 5.41% to $90.65 per barrel; WTI prices soared 5.46% to $87.44 per barrel. International observers suggest three possible drivers for the crude price rally: new oil sanctions on Iran; Tehran raising the stakes for oil transportation in the Hormuz strait; and the suspension of potential Saudi-Israel normalization which, as some experts had hoped, could have resulted in increased oil output by the kingdom.
"The immediate effect of this [Israel-Hamas] conflict has been a near biblical 'flight to quality' move in US assets across the board – stocks, bonds, the US dollar," Luongo said. "The move in equities was mixed. The NASDAQ ended the week less than 0.1%, while the Dow Jones Industrials were up over 1.1%. This is indicative of foreign capital fleeing into US blue chips rather than more speculative tech stocks. War is never good for innovation until after the shooting stops."
"People rightly worry more about the return of their money rather than the return on their money when tensions are high. This is why gold was up nearly $100 on the week, oil broke back above $90 per barrel, and the Dow was up 1.1% while high-quality sovereign debt yields fell 25 basis points," the expert continued.
Meanwhile, one should bear in mind that the ongoing fighting in the Middle East is not happening in a vacuum: in fact, it's unfolding against the backdrop of the NATO proxy war in Ukraine, global inflation and US/EU interest rate hikes, simmering US-China tensions, and steady erosion of trust in the Bretton Woods monetary system.
"Trust is gone in the post-Bretton Woods system. Shattered. Kaput. 'Stick a fork in it' as we Americans like to say. That will have immense and predictable effects on global trade and relations going forward," Luongo said.
"I would continue to advise being short Europe, as Belgium made the insane error to steal the frozen Russian foreign exchange reserves and hand them to Ukraine. This was a clear provocation by the EU telling Russia there will be no peace between them in the future. By doing this, it ends any illusions that we can return to the pre-war state of international finance," the expert noted.
Per Luongo, the world is currently in uncharted waters and may be dragged into a global financial crisis. He does not rule out an oil price spike and commercial debt markets seizing up, condemning "ruinous foreign and monetary policy" by Washington and Brussels, who have for years been engaged in irresponsible money-printing, regime change practices, and overseas wars.