Tensions in the Middle East are causing concerns among global markets as investors are closely watching the geopolitical risks associated with Israel's conflict with Hamas. The possibility of other countries becoming involved in the conflict has led to fears of increased oil prices.
Israel has announced that it will allow residents of Gaza to evacuate to the south as the Israel Defense Forces prepare for a ground assault in response to Hamas' recent terror attack. This has further heightened the tension in the region.
As a result of these developments, oil prices rose by nearly 6% on Friday, as investors factored in the risks of a wider conflict in the Middle East. The S&P 500 index also experienced a 0.5% decline in trading. Additionally, European natural gas prices surged to their highest levels since March due to the temporary closure of an Israeli gas field that supplies Egypt and Jordan, raising concerns about supply.
The potential for a ground invasion of Gaza and a significant loss of life has raised alarm among experts. Ben Cahill, a senior fellow at the Center for Strategic and International Studies, has noted that conflicts of this scale inevitably lead to market reactions.
Investors have responded by turning to safe-haven assets. This has resulted in a rise in gold prices of over 3% and an increase in the value of the U.S. dollar to a one-week high. Prices for Treasuries have also seen a rise.
Although the market reaction has been relatively muted in the first week of the conflict, the Israeli shekel has hit a seven-year low against the dollar. To stabilize its currency, Israel's central bank sold up to $30 billion in foreign currency reserves.
The potential expansion of the conflict could lead to rising inflation and central banks accelerating interest rate hikes to control price spikes. However, Bernard Baumohl, chief global economist at The Economic Outlook Group, suggests that the U.S. may be an exception if investors pour capital into Treasuries, causing rates to fall and the dollar to strengthen.
The outcome of the conflict and its impact on markets remains uncertain. Erik Nielsen, group chief economics adviser at UniCredit, emphasizes that market behavior will heavily depend on whether the conflict remains localized or escalates into a broader Middle Eastern war.