Navigating Geopolitical Turbulence: The Israel-Gaza Conflict and Its Impact on Global Markets

16h October, 2023

The world is once again grappling with a significant geopolitical crisis, the ongoing conflict in Israel and Gaza. In an era of unpredictability, this development is yet another curveball thrown at the global economy, demanding that investors, savers, and businesses adapt swiftly. In this blog, we will delve into the multifaceted impact of this conflict on financial markets, exploring the immediate effects following the initial incursion by Palestinian Militant forces and projecting what lies ahead.

Global Risk Sentiment

The Israel-Gaza conflict has sent ripples through the global financial landscape, impacting risk sentiment on a broad scale. In times of geopolitical turmoil, investors tend to err on the side of caution, seeking refuge in safe-haven assets. This response has been evident in the recent increase of gold and silver prices. However, one of the most noteworthy shifts in response to the conflict has been the rapid ascent of US Treasury yields.

The soaring US Treasury yields have reverberated beyond the bond market, casting a shadow over risk assets and financial stability. As yields on US government bonds, traditionally considered among the safest investments, rise to higher levels, their competitive appeal increases. Consequently, investors may opt for the relative safety of government bonds, sparking selling pressure in riskier markets, which, in turn, affects overall risk sentiment.
This flight to safety is not isolated; it’s part of a broader narrative. In a 5 years marked by record-high central bank base rates, surging inflation rates, and Europe’s first major conflict in years, it reflects a natural response to economic and geopolitical uncertainties. As the world watches the ongoing developments in the Israel-Gaza conflict, investors are bracing for continued volatility while seeking secure harbours.

Equity Markets in Focus

The effect on global equity markets has been mixed. During the week after the initial offensive by Hamas on October 7th, the S&P500 has registered a slight decrease, while the Euro Stoxx 50 has seen close to a 1% uptick, and the Dax has remained relatively stable. Clearly, the conflict has had a limited impact on equity markets, reaffirming that inflation and interest rates remain the primary market drivers.

Volatility has increased, with the VIX Index, which measures the volatility of the S&P500, spiking from 13 to the 19-20 range – the lowest levels recorded since the beginning of 2020.

Commodities Sector

Oil prices have experienced a sharp rise as a direct consequence of the conflict. As of Monday (16/10/2023), prices have stabilised above the $90 per barrel threshold as market participants closely monitor developments. Brent futures jumped by 7.5% on Friday as investors factored in a broader Middle East conflict. The Israel-Hamas conflict presents the most significant risk to oil markets since Russia’s invasion of Ukraine, with the possibility of additional Middle Eastern players getting involved painting a potentially grim picture. However, despite last week’s increase, oil prices remain well below the highs seen earlier in the summer, with neither Israel nor Palestine being major oil producers.

Investors must exercise caution when comparing the impact of this conflict to Russia’s invasion of Ukraine. The dynamics of today’s global supply and demand are significantly more balanced, in contrast to the supply shortages experienced during the Ukrainian crisis, which led to skyrocketing prices when Russia restricted supply to the West.

Markets wait to see If neighbouring countries join the conflict, which will likely send Oil prices higher. “Any further comments from Iran will much be in focus” said Fiona Cincotta, senior markets analyst at City Index.

Looking Ahead

As investors, it is our responsibility to look to the future and discern the lasting effects of this conflict. In the event of further escalation, we can anticipate heightened volatility. Staying invested in a well-diversified, goal-oriented portfolio continues to be an effective strategy. Historically, diversified portfolios have weathered times of crisis well, and geopolitical events have not generally left a long-term mark on the markets.

Framont & Partners Management is here to engage in discussions regarding your portfolio, its strategy, and how we can provide assistance.

Written by
Archibald Humpage
Client Executive

Contact Archibald Humpage

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