Global markets are bracing for the repercussions as tensions escalate in the Middle East

Israeli tanks following a mass infiltration by Hamas militants from the Gaza Strip, at Kibbutz Beri in southern Israel, October 14, 2023. REUTERS/Violeta Santos Mora Obtaining licensing rights

WASHINGTON (Reuters) – The war between Israel and Hamas has brought heightened geopolitical risks into sharper focus for financial markets, as investors wait to see whether the conflict will attract other countries with the potential to raise oil prices further and deal a new blow. to the global economy.

Israeli Prime Minister Benjamin Netanyahu vowed Sunday to “destroy Hamas” as his army prepared for ground operations in Gaza to eliminate the militant group whose deadly assault across Israeli border towns stunned the nation.

Oil prices jumped about 6% on Friday, as investors appreciated the possibility of a broader conflict in the Middle East. The first indication of a reaction to the weekend’s developments is likely to come when oil trading begins in Asia later on Sunday.

“We appear to be headed toward a large-scale ground invasion of Gaza with significant loss of life,” said Ben Cahill, a senior fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies (CSIS). . “Any time there is a conflict of this magnitude, you are going to have a reaction from the market.”

The market reaction last week was relatively weak, although the Israeli shekel took a big hit.

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“I have no idea whether markets will still behave relatively well,” said Erik Nielsen, group chief economic adviser at UniCredit Bank. “It certainly depends on whether this latest conflict remains local or whether it escalates into a broader war in the Middle East.”

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The S&P 500 fell 0.5% on Friday. Safe-haven assets saw gold bought over 3% on Friday and the US dollar touched a one-week high.

The expanding conflict is also likely to cause inflation and, as a byproduct, accelerating interest rates around the world, said Bernard Baumol, chief global economist at the Economic Forecast Group in Princeton, New Jersey.

However, Baumol noted that while inflation and interest rates would likely rise in other countries in this worst-case scenario, the United States could be the exception as foreign investors pump their capital into what they see as a safe haven during global conflict.

“Interest rates may go down,” he said. “We expect the dollar to strengthen.”

In Europe, economists said the obstacle to another hike in interest rates by the European Central Bank was high.

The war between the Islamic Hamas movement and Israel constitutes one of the most important geopolitical risks to oil markets since the Russian invasion of Ukraine last year.

“If the Ukraine war has taught us anything, it is not to underestimate the impact of geopolitics,” George Moran, European economist at Nomura, said in a bank podcast a week ago.

Other energy markets could be affected, as seen in recent developments such as Chevron (CVX.N) halting natural gas exports via a major undersea pipeline between Israel and Egypt.

Analysts noted that rising oil prices are unlikely to have a significant impact on US gas prices or consumer spending.

Jack Ablin, chief investment officer at Cressit Capital, said the situation needs to be monitored.

“If oil production suddenly stops or oil transportation is disrupted, it certainly creates problems not only for economies but for markets as well,” he added.

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Ablin said that oil, oil company stocks, commodities in general, and gold in particular can serve as effective hedges for investors.

(Reporting by Matt Tracy in Washington, Saqib Iqbal Ahmed in New York, and Dara Ranasinghe in London; Reporting by Mohammed for the Arabic Bulletin) Editing by Megan Davies, Muralikumar Anantharaman, Emilia Sithole-Matarese and Deepa Babington

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