The ongoing conflict between Israel and Palestine has been a major source of instability in the Middle East for decades. The recent escalation in violence has raised concerns about its impact on the global financial markets.
Historically, any events that bring “market fear” such as war tension escalations changes risk flows. Safe havens such as Gold, JPY, USD and CHF turn more bullish for a period of time while risk assets see less buyer volume. Exactly 50 years ago, the Yom Kippur War of 1973 (October 6 to October 25) started. In the next 7 years, Crude went from $5 to 50, Interest Rates from 6.5 to 18, Gold from 42.22 to 875, Stocks lost almost 50% the following 52 weeks but ended about even after 7 years.
Oil prices have jumped on concerns that the situation in Israel and Gaza could disrupt output from the Middle East. On Monday morning, Brent crude, the international benchmark, climbed by $2.25 a barrel to $86.83, while US prices also rose. The price of West Texas Intermediate crude , the US benchmark, was up $2.50 a barrel at $85.30. Energy analyst Saul Kavonic told the BBC that global oil prices have risen “due to the prospect of a wider conflagration that could spread to nearby major oil-producing nations such as Iran and Saudi Arabia”.
The safe-haven dollar rose on Monday against the euro and sterling as military clashes between Israel and the Palestinian Islamist group Hamas deepened political uncertainty across the Middle East. The dollar index was last 0.25% higher at 106.49, while the Japanese yen – another traditional safe-haven currency – edged 0.1% higher to 149.16 per dollar, in thinned Asian trade, with Japan closed for a holiday. The euro and sterling each fell 0.5% against the broadly strengthening dollar. The euro dropped to $1.0531, and sterling to $1.2169. The Australian dollar , seen as a proxy for risk appetite, slid 0.4% to $0.6359. In Asia, China’s yuan held firm against the dollar on the first trading day after Golden Week holiday, underpinned by a stronger-than-expected official guidance fix. The offshore yuan rose 0.2% to 7.2943 per dollar.
The Israel-Hamas war has spooked equity markets all over with investors shifting towards safe-haven assets. The US stock futures declined while the Asian markets traded lower on Monday. Safe-haven gold prices rose over 1%. Spot gold jumped 1.2% to $1,853.79 per ounce, while the US gold futures climbed 1.2% to $1,867.80. “Gold has regained its safe-haven status following the geopolitical events over the weekend… We see the potential for gold to head for $1,880, but unless we see bond yields move materially lower, I doubt it can break $1,900 any time soon,” City Index Senior Analyst Matt Simpson told news agency Reuters. The upside in gold was capped by strong US economic data, which has strengthened the belief that the Federal Reserve is unlikely to end its monetary policy tightening cycle in the near term. Spot silver gained 0.7% to $21.75 per ounce, platinum was up 0.6% to $882.12 and palladium fell 0.3% to $1,154.49.
The Israeli new shekel fell to a seven-year low against the U.S. dollar when trading resumed Monday. “The Bank will operate in the market during the coming period in order to moderate volatility in the shekel exchange rate,” the Bank of Israel said.
The impact of the conflict on the financial markets will depend on a number of factors, including the severity and duration of the conflict, the response of the international community, and the reaction of investors. Some might even argue that the issue will not hold major market weight or escalate unless “big boys”, like the USA, other NATO countries, Russia, China, India etc, get deeply involved on the war front. However, it is clear that the conflict has the potential to have a significant impact on the global financial markets.