Israel-Hamas Conflict + the Impact on Capital Markets

Posted on October 20, 2023

By Sam Lawhon, Larson Director of Investments

A timely market update from your investment’s solutions team:

The Israeli conflict, spurred by the recent attack initiated by Hamas on October 7th, has sparked concern and unrest in the region. This paper offers insights into Hamas as an organization, outlines the events of October 7th, delves into the ongoing conflict, and emphasizes potential outcomes and their specific economic implications, shedding light on the heightened market volatility.

Hamas, an acronym for Harakat al-Muqawama al-Islamiyya (Islamic Resistance Movement), emerged in 1987, advocating for Palestinian independence and resisting Israeli occupation. Comprising political and military wings, Hamas engages in militant activities, often leading to conflicts with Israel. As a radical Arab group opposing Israeli occupation, Hamas diverged from the Palestinian Liberation Organization (PLO) and later gained control over the Gaza Strip.

Hamas’ surprise attack on October 7th involved a barrage of rockets targeting Israeli cities. The assault included ground infiltrations, naval attacks, and paraglider assaults, resulting in a full-fledged war. Israeli Prime Minister Benjamin Netanyahu stated, “Hamas thought we would break, but we will crush them.” As it stands, it seems neither group is interested in reaching a peaceful resolution. “The rhythm of the Israel-Hamas conflict had become increasingly routine, with regular Hamas terrorism followed by predictable Israeli reprisals… This routine is no more,” states a senior director from the Rafik Hariri Center.

The Israeli conflict has become a focal point of global concern, significantly impacting financial markets and the economy.

The volatile situation has injected considerable instability into global markets, making investment decisions more challenging for market participants. The primary market concern regarding this war is the price of oil. The Middle East is a significant global oil producer, responsible for a third of the world’s crude oil. Gaza and Israel, however, are not major producers. The potential of the war spreading across the wider Middle East is not only possible, but likely as events continue to unfold.

One worst-case scenario could be Israeli retaliation on Iran. While Iran denies involvement, Hamas openly thanked Tehran for their support, and Iran is known to supply Hamas with capital and arms. “A sharper escalation could bring Israel into direct conflict with Iran, a supplier of arms and money to Hamas… In that scenario, Bloomberg Economics estimates oil prices could soar to $150 a barrel and global growth drop to 1.7% — a recession that takes about $1 trillion off world output,” states Bloomberg Economics. War in this region would undoubtedly cause blockages in the Strait of Hormuz, one of the world’s most important maritime routes for oil transport. Brent crude has already risen by over 7% since the war started, priced at over $90 a barrel. This rise is speculative of the spread of the war through the middle eastern region, as again—the Israel/Gaza war thus far has had no effect on the actual supply of oil.

The ongoing escalation of the conflict poses significant risks to the global economy, particularly the United States. The current economic landscape is delicate due to the ongoing battle against inflation. Escalating gas prices could reignite inflation, endangering corporate profits and the overall economy. In the event of an inflation resurgence, the Federal Reserve might respond with additional rate hikes, exacerbating the ongoing bond market challenges.

Groups like Hezbollah along the Lebanon-Israel border have also become involved in the war. Hezbollah, another militant group offering support to Hamas, conducted several attacks on Israel over the weekend. Israel retaliated, and the attacks were later labeled “a warning” by a Hezbollah spokesman. The initial attacks on the northern border indicate further escalation of the conflict. There is also a possibility of involvement from the United States. Retired General Barry McCaffrey states, “The U.S. is likely to directly intervene with air and naval strikes if Israel’s existence is threatened.” The U.S. has already sent an aircraft-carrier group to patrol the Eastern Mediterranean; however, this is a cautionary measure and not an active engagement in the war.

The general direction of the war is fraught with unpredictability.

If it were to spread across the Middle East, predicting the market’s reaction becomes challenging. However, conflict of any sort has never been beneficial for the global economy. Involvement from countries outside the region is speculative, and the market could respond in numerous ways.

Another evident impact of the war is widespread disruption, amplified by the age of social media. Accessibility to real-time information about the ongoing conflict allows people globally to develop strong opinions. While this connectivity isn’t inherently negative, it’s crucial to anticipate potential outcomes. Support for both groups reach far beyond the borders of Israel and Gaza. This broad support base has prompted public demonstrations, both physically and through various online platforms. It’s important to emphasize that, thus far, there have been no credible incidents of violence related to the conflict outside the Middle East. However, the social implications are noteworthy, particularly in countries like the United States, which is home to diverse cultures and perspectives.

The ongoing Israeli conflict is undeniably a deeply saddening situation, presenting a myriad of potential economic and geopolitical consequences. Given the unprecedented scale of this conflict, accurately predicting its long-term effects remains challenging. The looming possibility of other nations becoming embroiled in the conflict emphasizes the need for comprehensive fact-checking and discernment amidst the rampant spread of misinformation. If the conflict remains regional, there will not be much economic impact. The conflict in Israel as sad as it is, has been going on for decades. Not only that, but the region bears very little global economic impact. It is also important to consider that in the modern world, oil is a less dominant form of energy as we have seen a rise in alternative fuel sources. Given such, even if the supply of oil is affected, the outcome may not be as grave as prior oil shortages. Beyond the economic repercussions, the gravest tragedy is the needless loss of human lives. Ultimately, the individuals enduring the direct violence of war bear the heaviest burden.

Thank you for your continued trust,
Larson Investment Solutions Team

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