How Middle East Tension Could Affect Global Markets
The Impact of the Israel-Gaza Conflict
An escalation of the Israel-Gaza war into a broader conflict could have significant implications for global growth and inflation. While market reaction has been relatively modest so far, the situation remains fluid and could change rapidly.
Hamza Meddeb, director of the political economy program at the Malcolm H. Kerr Carnegie Middle East Center in Beirut, highlights the potential for the conflict to involve Iran’s proxy armed groups, such as Hezbollah. Such an escalation could lead to increased oil prices, concerns about oil supply, and the potential for a global economic downturn.
The Role of Iran and Oil Prices
One scenario that experts are closely monitoring is the possibility of Iran becoming more involved in the conflict. This could result in a crackdown on Iranian oil exports, leading to an immediate reduction in oil supply. Hedge fund Cayler Capital’s founder and CIO Belote suggests that this could remove anywhere from 1-2 million barrels per day from the market.
In the unlikely event that the United States sends troops into the Middle East, oil prices could see a significant jump. During the Yom Kippur war in 1973, oil prices surged over 300%. However, experts believe that the current global oil supply is more diversified, and Israel has better relations with other Arab countries compared to the past, mitigating some of the potential impact.
Inflation Concerns and Bond Market
The threat of higher oil prices also raises concerns about inflation. If oil prices spike, it could halt the downward trend of inflation and potentially lead to higher commodity prices. Alessia Berardi, head of emerging markets macro and strategy research at Amundi, warns that this could trigger a less disinflationary outlook.
The potential for higher inflation and rising oil prices could also have implications for the bond market. The S&P U.S. aggregate bond index, which tracks the performance of Treasuries and corporate debt, has already seen a decline from its January 2021 peaks.
Impact on Currencies and Emerging Markets
The conflict in the Middle East has led to increased demand for safe-haven currencies, such as the U.S. dollar and the Swiss franc. However, if high oil prices and inflation trigger a U.S. recession, the dollar may not remain a one-way bet. Trevor Greetham, head of multi-asset at Royal London, suggests that a global risk-off move could also strengthen the Japanese yen as Japanese investors repatriate their funds.
While Israel’s currency, bonds, and stocks have been directly affected by the conflict, other emerging markets have largely shrugged off the tensions for now. However, Aegon Asset Management’s Jeff Grills warns that a regional escalation could have severe consequences for oil-importing countries, further exacerbating their economic challenges.
Technology and Infrastructure Risks
War-related disruptions can have unintended consequences for various sectors. The potential disruption to global internet traffic, with at least 17% crossing through Egypt, could impact digital connectivity. Additionally, airline stocks may suffer while defense stocks outperform. The conflict has already led to a decline in MSCI’s airline stock index, while aerospace and defense shares have seen an increase.
This analysis highlights the potential impact of the Israel-Gaza conflict on global markets. As the situation continues to evolve, market participants will closely monitor developments and assess the implications for various asset classes.
