The ongoing conflict between Palestine’s Hamas and Israel has raised concerns about geopolitical risks in financial markets, prompting investors to closely watch for potential repercussions that could affect oil prices and the world economy.
Oil prices experienced a sharp increase of nearly 6% on Friday as investors considered the possibility of a broader conflict in the world, especially in the Middle East. The market’s initial response to the weekend’s developments will likely be reflected when oil trading resumes in Asia. The past week has seen a relatively restrained market response, although Israel’s currency, the shekel, took a substantial hit. Erik Nielsen, Group Chief Economics Advisor at UniCredit, acknowledged the uncertainty surrounding market behavior, stating that much hinges on whether the conflict remains localized or escalates into a broader war in the Middle East.
The S&P 500 index fell by 0.5% on Friday, prompting investors to turn to safe-haven assets like gold, which saw a more than 3% increase, and the U.S. dollar, reaching a one-week high. A widening conflict is likely to drive inflation and interest rates higher globally, except potentially in the United States, where foreign investors may seek safety, thus potentially strengthening the U.S. dollar. Economists in Europe suggested that another rate hike from the European Central Bank might face a high threshold due to the conflict.
The Hamas-Israel war represents a significant geopolitical risk to oil markets, akin to the impact of Russia’s invasion of Ukraine last year. Recent developments, such as Chevron’s suspension of natural gas exports between Israel and Egypt, indicate potential implications for other energy markets. While the rise in oil prices may not substantially affect U.S. gas prices or consumer spending, analysts recommend closely monitoring the situation.
