WHAT ATTACKING ISRAEL MEANS FOR THE MARKETS
This weekend saw a significant escalation of violence as surprise attacks from Gaza claimed hundreds of lives, dozens of captives and thousands of wounded. This disturbing development has cast a shadow over the ongoing peace talks between Israel and Saudi Arabia and raised questions about the possibility of their continuation. Although a potential Israeli-Saudi agreement brings tangible and symbolic benefits, the ongoing chaos seems to negate the very foundations of the peace process initiated in 1978 with the noble aim of freeing the region from the shackles of constant conflict and damage.
External elements are greatly affected by such a situation. For example, the financial markets find themselves having to reflect this new surge in violence in market dynamics and prices. Although the economic suffering on the battlefields may seem unfortunate, the fact remains: markets prioritise economic demand in relation to major players such as Iran, an OPEC member and major oil producer, rather than territories such as Israel (ranked 28th in the World Bank's 2022 GDP rankings) or the West Bank and Gaza (120th).
Iran's involvement in the attacks, as reported by The Wall Street Journal, could have significant international implications. Specifically, the United States could consider tightening existing sanctions imposed on Iranian exports. According to analysts at Goldman Sachs, trends prior to the attack that suggested a de-escalation of tensions in the region have contributed positively to Iran's oil production, which has seen an increase of nearly half a million barrels per day in the previous year. Taking these indicators into account, they estimate that a daily drop of 100,000 barrels in Iranian production could raise Brent crude prices by just over $1 per barrel.
However, the likelihood of an actual Israeli-Iranian conflict seems low at present, given the limited involvement of Lebanese Hezbollah and geographical constraints that would not allow Israel to launch an invasion through Jordan and Iraq or through Saudi Arabia. As things stand, the potential for troops from both countries to enter a frontal missile battle is rather far-fetched.
There are concerns about the effectiveness of Israel's Iron Dome defenses if they cannot intercept Hamas rockets, leading to speculation about what Iran's advanced artillery could potentially achieve. According to an estimate by Dan Alamariu, chief global strategist at Alpine Macro, a Montreal-based investment research firm, an Israeli attack on Iran's nuclear facilities would be 20% likely to cause oil prices to spike above $150 a barrel.
Contrary to all the hype around dire predictions, Marko Papic, chief strategist at Clocktower Group, presents a different view. Through a chart, he illustrates that oil price changes during the major Israeli-Palestinian conflicts in the 21st century have remained essentially unchanged. It assumes that events in the Levant region generally do not have a significant outward impact, although it acknowledges the possibility of change.
Although this view is limited to this century, and neglects such important cases as the Yom Kippur War 50 years ago, it is crucial to note the substantial multi-year financial shifts that occurred after the pan-Arab attack on Israel. In the following seven years, oil prices rose from $5 to $50, interest rates rose from 6.5% to 18%, and the price of gold rose sharply from $42 to $875. In comparison, however, stocks managed to find stable ground during the first year, which was full of fluctuations.
Given the rising tensions and instability, it is worth considering the possibility that these events could be a positive catalyst for equities. As unlikely as it may seem, this event has the potential to halt or even reverse the deep decline in bonds over the next few months.
The immediate reactions to these events have been swift and significant: Israeli equities have seen a sharp decline, oil prices (CL00, 3.45%) have seen a sharp increase, Treasury bond futures (TY00, 0.35%) have risen while the cash market has been closed for Columbus Day, gold (GC00, 0.98%) has seen a rise, and equity futures (ES00, -0.63%; NQ00, -0.81%) have seen a decline. However, oil prices have already begun to retreat from their highs.